the late nineteenth and early twentieth centuries, the fastest-growing regions of the world were resource-rich areas such as North America, Latin America and Scandinavia, suggesting that the resource curse has not always existed.
Ethnic divisions can hamper growth in various ways, but their influence should not be exaggerated. Ethnic diversity is the norm elsewhere too. Even ignoring ethnic diversities in immigration-based societies such as the US, Canada and Australia, many of today’s rich countries in Europe have suffered from linguistic, religious and ideological divides – especially of the ‘medium-degree’ (a few, rather than numerous, groups) that is supposed to be most conducive to violent conflicts. Belgium has two (and a bit, if you count the tiny German-speaking minority) ethnic groups. Switzerland has four languages and two religions, and has experienced a number of mainly religion- based civil wars. Spain has serious minority problems with the Catalans and the Basques, which have even involved terrorism. Due to its 560-year rule over Finland (1249 to 1809, when it was ceded to Russia), Sweden has a significant Finnish minority (around 5 per cent of the population) and Finland a Swedish one of similar scale. And so on.
Even East Asian countries that are supposed to have particularly benefited from their ethnic homogeneity have serious problems with internal divisions. You may think Taiwan is ethnically homogeneous as its citizens are all ‘Chinese’, but the population consists of two (or four, if you divide them up more finely) linguistic groups (the ‘mainlanders’ vs. the Taiwanese) that are hostile to each other. Japan has serious minority problems with the Koreans, the Okinawans, the Ainus and the Burakumins. South Korea may be one of the most ethno-linguistically homogeneous countries in the world, but that has not prevented my fellow countrymen from hating each other. For example, there are two regions in South Korea that particularly hate each other (Southeast and Southwest), so much so that some people from those regions would not allow their children to get married to someone from ‘the other place’. Very interestingly, Rwanda is nearly as homogeneous in ethno-linguistic terms as Korea, but that did not prevent the ethnic cleansing of the formerly dominant minority Tutsis by the majority Hutus – an example that proves that ‘ethnicity’ is a political, rather than a natural, construction. In other words, rich countries do not suffer from ethnic heterogeneity not because they do not have it but because they have succeeded in nation-building (which, we should note, was often an unpleasant and even violent process).
People say that bad institutions are holding back Africa (and they are), but when the rich countries were at similar levels of material development to those we find in Africa currently, their institutions were in a far worse state.[6] Despite that, they grew continuously and have reached high levels of development. They built the good institutions largely after, or at least in tandem with, their economic development. This shows that institutional quality is as much an outcome as the causal factor of economic development. Given this, bad institutions cannot be the explanation of growth failure in Africa.
People talk about ‘bad’ cultures in Africa, but most of today’s rich countries had once been argued to have comparably bad cultures, as I documented in the chapter ‘Lazy Japanese and thieving Germans’ in my earlier book
Thus seen, what appear to be unalterable structural impediments to economic development in Africa (and indeed elsewhere) are usually things that can be, and have been, overcome with better technologies, superior organizational skills and improved political institutions. The fact that most of today’s rich countries themselves used to suffer (and still suffer to an extent) from these conditions is an indirect proof of this point. Moreover, despite having these impediments (often in more severe forms), African countries themselves did not have a problem growing in the 1960s and 70s. The main reason for Africa’s recent growth failure lies in policy – namely, the free- trade, free-market policy that has been imposed on the continent through the SAP. Nature and history do not condemn a country to a particular future. If it is policy that is causing the problem, the future can be changed even more easily. The fact that we have failed to see this, and not its allegedly chronic growth failure, is the real tragedy of Africa.
Thing 12
Governments can pick winners
Governments do not have the necessary information and expertise to make informed business decisions and ‘pick winners’ through industrial policy. If anything, government decision-makers are likely to pick some spectacular losers, given that they are motivated by power rather than profit and that they do not have to bear the financial consequences of their decisions. Especially if government tries to go against market logic and promote industries that go beyond a country’s given resources and competences, the results are disastrous, as proven by the ‘white elephant’ projects that litter developing countries.
Governments can pick winners, sometimes spectacularly well. When we look around with an open mind, there are many examples of successful winner-picking by governments from all over the world. The argument that government decisions affecting business firms are bound to be inferior to the decisions made by the firms themselves is unwarranted. Having more detailed information does not guarantee better decisions – it may actually be more difficult to make the right decision, if one is ‘in the thick of it’. Also, there are ways for the government to acquire better information and improve the quality of its decisions. Moreover, decisions that are good for individual firms may not be good for the national economy as a whole. Therefore, the government picking winners against market signals can improve national economic performance, especially if it is done in close (but not too close) collaboration with the private sector.
Eugene Black, the longest-serving president in the history of the World Bank (1949–63), is reported to have criticized developing countries for being fixated on three totems – the highway, the integrated steel mill and the monument to the head of the state.
Mr Black’s remark on the monument may have been unfair (many political leaders in developing countries at the time were not self-aggrandizing), but he was right to be worried about the then widespread tendency to go for prestige projects, such as highways and steel mills, regardless of their economic viability. At the time, too many developing countries built highways that remained empty and steel mills that survived only because of massive government subsidies and tariff protection. Expressions like ‘white elephant’ or ‘castle in the desert’ were invented during this period to describe such projects.
But of all the then potential castles in the desert, South Korea’s plan to build an integrated steel mill, hatched in 1965, was one of the most outlandish.
At the time, Korea was one of the poorest countries in the world, relying on natural resource-based exports (e.g., fish, tungsten ore) or labour-intensive manufactured exports (e.g., wigs made with human hair, cheap garments). According to the received theory of international trade, known as the ‘theory of comparative advantage’, a country like Korea, with a lot of labour and very little capital, should
Worse, Korea did not even produce the necessary raw materials. Sweden developed an iron and steel industry quite naturally because it has a lot of iron ore deposits. Korea produced virtually no iron ore or coking coal, the two key ingredients of modern steel-making. Today, these could have been imported from China, but this was the time of the Cold War when there was no trade between China and South Korea. So the raw materials had to be imported from countries such as Australia, Canada and the US – all of them five or six thousand miles away – thereby significantly adding to the cost of production.
