I recently listened to a podcast with Mushtaq Khan. He’s a development economics expert. He argued that productivity is primarily a result of knowing how to build good institutions (in the broad sense, this means businesses just as much as it means state institutions). He also argued that the traditional views of, and attempts to combat, corruption were hopelessly wrong.
His argument for institutions as being central to productivity is simple. Hospitals in developing nations are drastically less efficient not because the doctors are worse, most procedures are not hard and those same doctors perform fine when they go to the west, or due to equipment but due to bad organization. A particularly compelling part of the podcast was where he talked about wage differences and why they’re ultimately irrelevant. The productivity gap between a developing and developed nation can be 20 or 30x. Even for labor intensive goods, labor is only a minority of cost. Hence given the productivity differential no amount of wage lowering will make a 3rd world nation competitive. The real reason bangladesh won in textiles was not low wages, which every 3rd world country has but
- A new protectionist agreement from the US excluding turkey/korea etc… from US markets but allowing LEDC’s like bangladesh
- A korean firm essentially training a few hundred Bangladeshi’s and then those going off to build hundreds of businesses in Bangladesh.
When he talks about corruption he says things that resonate quite strongly with me, much more so than traditional narratives I see in NGO’s or university courses. Corruption is not the work of a small elite, It’s everywhere, everyone benefits and it’s essentially an equilibrium. Transparency doesn’t work. Everyone already knows who;s corrupt. Law enforcement and anti-corruption commissions don’t work. They become corrupted and worse are used to attack the enemies of the state. (Remember, everyone is corrupt. You have to be if you want a job. Hence anti-corruption drives and laws are just used to attack people who get on the wrong side of those with power or, ironically, who rock the boat and threaten to expose corruption).
What’s the solution to corruption? He’s less persuasive here and to be fair that’s expected. All states are different and changing the equilibrium from "everyone is corrupt and you must be too if you want to do business/not be killed" to "corruption is abnormal" is hard. His argument is that it happens when rules and law enforcement becomes in the interest of large organizations and when orgs can check each other. Being judged by your peers in a common law system. Korean firms requiring more reliable courts and legal systems as they grew and needed to be able to reliably make and enforce contracts with thousands or tens of thousand of suppliers. An argument he makes is that Korea’s success was not due to industrial policy, everyone did industrial policy and it didn’t work in most places, but due to Japanese colonialism wiping away patronage networks meaning the dictator was free to give out subsidies and then also to remove them, something that was not possible in other nations where firms had a great deal of political influence and would receive subsidies based on that influence, subsidies which could not be removed by leaders without risking backlash from the firms political network.
I’m a lot less convinced by his solutions than I am by his analysis of the problem. And I’m skeptical of problem analysis too. Broadly, I think there are a few problems I have with his views
- A persuasive sounding story != a true or complete story
- Incentives aren’t everything. Capacity also matters.
- There are many other factors.
First let’s talk one meta-level up. I’ve read mean books on development. More than a few of them focus on Asia and SK in particular but a few went further back and looked at the industrial revolution and European/American development. One thing is consistent among the good ones. They all tell stories that sound plausible but are absolutely incompatible.
- Bad Samaritans attributes S Korea’s success to industrial policy
- How Asia Works attributes success to industrial policy + agricultural reform + export discipline
- Other articles attribute success to genetics, specifically IQ
- Lack of state dominance, e.g the democratic liberalism of the UK and US
- geography & geopolitics
- waterways and natural cost of transportation
- culture Reading them in isolation, most of these theories can sound plausible but they can’t all be true. I’m very skeptical of my ability to tell which development theory is true based on how persuasive a specific author/thinker makes it sound.
Second, incentives. His whole shtick is giving the various actors in society the right incentives. The problem here is that incentives aren’t all that matter. Put an ardent communist in power and give them the right incentives to make the state effective, they’ll just try different variants of communism. Running a country means choosing from a near infinite variety of options. You’ll only consider a limited subset based on what is normal and what you think is likely to work. This is largely based on your ideology. Giving leaders good incentives is all fine but it’s not enough. There has to be an ideology of economics/politics which is decent enough to give them good options to choose form. This bleeds over into point 3, other factors.
The most damming criticism for me is the lack of steel-manning of opposing views. He talks a lot about institutions and incentive equlibriums. I think these things are important. I think other things are also important. Do you have hostile neighbors. Is the state strong enough to control it’s territory. Is there a common national identity or is your state just some lines on a map? Is the ruling elite educated or not? What’s the dominant ideology? What is the culture like? (Is China’s 1000+ years of Confucian bureaucracy really unrelated to their country running well despite having a billion+ people?).
All in all interesting to listen to but not enough to overcome my high meta-skepticism of anything I read/see/hear on development economics.
Also, I think it’s good to write things like this. The perfect is the enemy of the good. My main aim should be to write a lot because my main problem is not writing enough. Also, writing is a skill and a habit. The more I write, the more I develop both. (Also, no one actually reads my writing so there’s no risk of me misleading people by writing things that are wrong)