The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor

by David S. Landes

  So the American industry is poised today between old ways and new. The big auto makers are relying more than before on parts suppliers, within and without the enterprise, to do much of the component assembly, in effect pushing the burden back à la japonaise and holding their wage bill down. To keep inventories lean, they are demanding just-in-time deliveries, some of them at twenty-minute intervals. Some affiliated partsmakers are now working for outside car makers as well as for the mother assembly plant, thereby maximizing the rate of utilization. Come a strike against the parent company, should the workers in the plant continue to produce for competitors? That’s a hard one. Old-timers say no; others point to painful reality. If labor gets too difficult, they warn, the auto makers will turn to more cooperative suppliers, say in Mexico. (Viva la NAFTA!) The big boys cannot afford to let a parts supplier hang up the whole process. The pragmatists have been winning the argument. (In effect, the possibility of such diversion has sapped labor’s bargaining power.) Labor ideologues are not happy: “You’re seeing a taste of business unionism,” they scold. Labor in bed with management.32 Can this be love?

  Meanwhile Japanese car makers are beginning to feel such Asian rivals as Korea nipping at their heels. No rest or end in this kind of war.

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  Losers

  Strung out behind the leaders and followers—in the sense of those who are keeping pace or catching up—are most of the world’s peoples.

  By comparison with East Asia, the rest of the world looks like a study in slow motion, or even one step forward, two steps back. The Middle East has much going for it, in particular, huge oil revenues (some $2 trillion [1012] in the twenty years after 1973), but its political, social, and cultural institutions do not ensure security of enterprise or promote autonomous technological development. Also, cultural attitudes, and above all, gender biases, inhibit industrial undertakings. One result is high rates of unemployment and underemployment, made worse and angrier by education: people who have been to school expect more.1

  To be sure, well-meaning governments in the region have tried to substitute for private initiative. Thus Egypt, recalling the industrial projects of Muhammad Ali one hundred years earlier, decided after World War II to invest in cotton-spinning mills. The idea seemed foolproof. Egypt grew the finest long-fiber cotton in the world; why not work it up and gain the value added? The trouble was, the yarn turned out by these callow mills was not of international quality, while foreign growers sought to upgrade their raw cotton and weavers looked for ways to make high-quality cloth with poorer varieties. Never underestimate the ingenuity of good technicians: before the Egyptians could turn around, they were stuck with poor cloth for the home market and had lost part of their export market for raw cotton. Egypt, unfortunately, was not the only example of industry aborted. The African continent abounds in projects and disappointments.

  Failure hardens the heart and dims the eye. Up to now, Middle Eastern losers have sought compensation in religious fundamentalism and military aggression. On the popular level, prayer and faith console the impotent and promise retribution. Hence the apocalyptic tone of much Muslim preaching and discourse: the End will bring redress. Meanwhile, the strong resort to force. They find it easier to seize and screw than to make and do. So for Iraq, which thought to get rich quicker by grabbing oil and looting houses in Kuwait than by manufacturing salable commodities. Why buy arms if not to use them?

  Will these counterproductive tendencies pass? Impossible to say. They are not accidental but visceral. The international experts keep their chin up (that’s what they’re paid for) and offer modest recipes for improvement. Thus the World Bank, with its talk of “adjustment,” reminds us that good policies pay. What are good policies? Realistic, competitive exchange rates, low or no budget deficits, low or no barriers to trade, markets, markets, markets.

  Such “improvements in the macroeconomic framework” do help. They clear major distortions and obstacles. But they do not come easy. How does one eliminate budget deficits when half the workforce is employed by the state unproductively and political stability is tied to inefficiency? (This kind of problem afflicts even rich nations. Look at Europe and the Maastricht criteria for the euro curency.)

  And that’s only the beginning. The real work of building structures and institutions remains. Besides, what happens when the oil is gone?*

  Latin America has had almost two hundred years of political independence to graduate to economic independence. It remains, however, a mixed area, wanting in local initiatives, technologically patchy, entrepreneurially needy. This pattern of arrested development reflects the tenacious resistance of old ways and vested interests. In particular, the apparently rational focus on land and pastoralism (long live comparative advantage!), reinforced by social and political privilege, bred powerful, reactionary elites ill-suited and hostile to an industrial world. This disjuncture, when combined with social discontents—so many poor—invited antidemocratic, though populist, solutions (caudillismo), terrible when durable, destructive when fragile.

  So industry came late. This need not be a handicap; lateness has its advantages. But everything depends on the quality of enterprise and the technological capability of the society. In most of Latin America, industry came in under the shelter of import substitution: high tariffs, discriminatory legislation and regulations, nontariff barriers to imports. As we know from American experience in the nineteenth century and Japanese in the twentieth, such measures may work in a context of energetic emulation, of exigent, world-level (export-capable) standards, of domestic competition. In Latin America, this impulse was largely wanting. Not everywhere. Some industry is on the cutting edge. But most is well behind the frontier, panting behind protective walls.

  This protection has been justified by national interest or by anti-colonialist ideologies that, if pushed to their logical conclusion, would suggest an end to all exchange with the more advanced industrial nations abroad. (Latin America has been a field of dichotomous perspective: center vs. periphery, neocolonialists vs. victims, bad guys against good.) Fortunately, that has not happened. Such exercises in pure reason (or unreason) are more suited to scholars’ studies than to the halls of government, as President Cardoso of Brazil, once a flag-bearer of the dependency school, has now discovered.

  We should not underestimate the importance of that discovery: just because something is obvious does not mean that people will see it, or that they will sacrifice belief to reality. In the effort to have things both ways, or every way, to appease old interests, to encourage new, to keep the foreigner away while bringing him in, most Latin nations have resorted to the manipulation of trade and money: import barriers and quotas, differential rates of exchange, a carapace of restrictions that some have called the “inward-looking model”—and, of course, to borrowing.2

  Such measures can provide temporary relief, but at a heavy price: constant adjustments, currency black markets, runaway inflations, high transaction costs, a chilling of foreign investment. Even so, some Latin American countries were able to borrow ridiculously large sums from official international lenders (World Bank, IMF) and from private commercial banks, acting with the encouragement of their governments and, no doubt, tacit assurances of a rescue safety net. Much of this money found its way back to secret private accounts in the United States, Switzerland, and other cozy shelters.

  The combination of mismanagement, profligacy, corruption, and open-ended borrowing—development without efficiency constraints—cannot long endure. Such structures are intrinsically brittle, because everyone is straining to the limit and everything is interconnected. Sooner or later, someone gets worried; the balance sheets do not balance; the lenders get cold feet; it becomes impossible to pay old debts with new. Panic!

  This happened in the Mexican peso crisis of 1994-95. It couldn’t have come at a worse (some would say, a better) time, just after the American administration managed to squeeze through the North American Free Trade Agreement (NAFTA) by calli
ng in every political chip and committing to a mountain of anti-economic favors. Now it had to find tens of billions to reassure the market and give investors and monetary allies the time to pull their chestnuts out. But this time it could not get fast action from a recalcitrant, narrow-minded Congress. Not to worry: the technicians, led by economist Lawrence Summers, found some $20 billion lying quietly in an account established over half a century earlier with the profits realized in the 1930s by repudiating obligations in gold. These ill-gotten gains had been set aside at the time to protect the American dollar…Well, one could say that a collapse of the peso and the liquidation of American holdings in Mexico would have done terrible damage to NAFTA and the American dollar…Those $20 billion plus another $30 billion cobbled together from international lending organizations saved the day. The American government subsequently made much of quick repayment by Mexico, and the press played down, or never noticed, the fact that the Mexicans had to borrow the money. New debt for old.

  The heart of the matter is Latin America’s need to go on borrowing, if only to pay interest on older loans. A research student from Latin America once complained to me about this burden of old debt and the vexatious, small-minded foreign insistence on repayment. “You don’t have to repay,” I pointed out; “a sovereign nation can always repudiate.” “Yes,” he replied, “but then where shall we go to borrow more?” Exactly. Now, however, the banks are wary, and international lending organizations are tying their support to fiscal and trade reform in the direction of openness. The code word is “adjustment”—surely a good thing. A more open market is a force for rationality and efficiency, a reordering of economic activity in the direction of comparative advantage, a constraint on corruption and favoritism. And the prospect of aid may be an incentive to cooperation in the struggle against the drug trade—an industry whose growth can only be guessed at.3 No guarantees. But better a push in the right direction than a return to the status quo ante.

  Among the heaviest losers in this period of record-breaking economic growth and technological advance were the countries of the Communist-Socialist bloc: the Soviet Union at the bottom of the barrel, Romania and North Korea almost as bad, and a range of satellite victims and emulators struggling to rise above the mess. Best off were probably Czechoslovakia and Hungary, with East Germany (the DDR) and Poland trailing behind. The striking feature of these command economies was the contradiction between system and pretensions on the one hand, performance on the other. The logic was impeccable: experts would plan, zealots would compete in zeal, technology would tame nature, labor would make free, the benefits would accrue to all. From each according to his ability; to each according to his deserts; and eventually, to each according to his needs.*

  The dream appealed to the critics and victims of capitalism, admittedly a most imperfect system—but as it turned out, far better than the alternatives. Hence the Marxist economies long enjoyed a willfully credulous favor among radicals, liberals, and progressives in the advanced industrial nations; and a passionate, almost religious endorsement by the militant “anti-imperialist” leaders of the world’s poor countries. Many colonies, now independent, turned to the socialist paradigm with a hunger and passion that defied reality.4

  These favorable predilections long concealed the weaknesses of such command economies. In fact, although the Russian state was capable of mobilizing resources for specific projects, technique was generally backward and overall performance shoddy. The impressive production data were intrinsically and deliberately exaggerated. They should have been heavily discounted for propaganda; also for deterioration and unsold (unsalable) commodities. (Except for caviar, vodka, and folkloric mementoes, nothing Russia made could compete on the world market. ) Apartment buildings hung nets around the perimeter to protect pedestrians from falling tiles or stones. Thrifty consumers paid a small fortune for tiny, primitive motor vehicles and then waited years for delivery. Even after they got a car, they found replacement parts unobtainable, and motorists routinely took their windshield wipers with them when they parked their automobiles. Electrical appliances were at the mercy of fluctuating house current. National income data excluded services, for reasons of economic doctrine—only real product counted. But in fact, the less said about services the better: inconveniences balanced advantages. No friend like a good plumber. Or someone in the nomenklatura, the privileged elite, with their special stores and clubs, their access to foreign imports, their quasi-exemption from dregs and dross.

  Some see this endemic mess as a dirty secret of the system: rulers nourished privation by way of rewarding favorites, building desire in the ambitious, and dulling the rest in the tedium of endless queues. The capitalist economies stimulated labor by the prospect of reward: “ya pays yer money an ya takes yer choice.” Communism offered “singing tomorrows.” But waiting had to be paid for, and tomorrow never came. When did the people in the queues work? The joke had it, they made believe they worked, and the state made believe it paid them.

  The worst aspect of the system, however, was its indifference to, nay, its contempt for, good housekeeping and human decency. Prosperity forgone was bad enough. In a world that had once created and still preserved some beautiful things, the new system mass-produced ugliness: buildings and windows out of true; stained and pocked exteriors, raw cement block; equipment out of order, rusting machinery, abandoned metal corpses—in short, raging squalor.

  Necessarily, what the system did to things, it did to people. How to survive in a wasteland dotted with junkheaps? In a world of systematic contempt for humanity? “White coal,” they called the people shipped in jammed, fetid freight cars to useless labor and oblivion in frigid wastes. (The USSR anticipated here the death trains and marches of Nazi Germany.) Some, spared or overlooked, heroically maintained oases of warmth and culture in tiny flats and rooms. Many more drowned disappointment and despair in vodka.

  Still, nature’s gifts remained. The greatest asset of the revolutionary regime was the unspoiled natural treasures it inherited from a late-developing economy. It ran these down with the recklessness that comes with self-proclaimed virtue.

  One place and one event stand for the whole. The place is the Aral Sea, once the fourth largest body of fresh water on the face of the earth, today a dying hole—half the original surface, a third of its volume, reeking with chemicals, fish gone, air hot and poisoned. Children in the region die young, one in ten in the first year. Decades of insolent plans, haste and waste, tons of pesticide, herbicide, and fertilizer, false economies such as unlined irrigation trenches enabled the Soviet Union to grow lots of cotton (“white gold”), while reversing gains in life expectancy and leading the way backward.5

  Aral, moreover, was not unique, though it was a worst case. In general, Soviet projects for diversion and reversal of water and for construction of industrial plants in previously clean settings took no account of environment. Priority went to virtual jobs and economic growth, and the bigger and more costly the task, the more ennobling. Siberia especially was seen as a tabula rasa, empty tundra, space and more space, to do with as one pleased: rivers to be turned backwards, the snows of the north to water the deserts of the south. Creation corrected: communism saw itself as antireligious and scientific, but it aimed at making gods of men. The biggest of these megalomaniacal schemes, which would have altered global climate, had to be abandoned. Prometheus fortunately re-bound.

  Aral was the place. The event was the meltdown of the atomic power reactors at Chernobyl in the Ukraine in 1986. The fire burned out of control for five days and spread more than 50 tons of radioactive poison across White Russia (Belarus), the Baltic states, and parts of Scandinavia—far more than the bombs at Hiroshima and Nagasaki combined. The prevailing winds blew north-northwestward, but no one will convince those Turks who later came down with blood diseases or the thousands of pregnant women from Finland to the Adriatic who had precautionary abortions that they were not victims too. Among the unquestioned casualties were the brave m
en sent in to fight the fire and clean up afterwards. They were promised special compensation and did not always get it. Relief funds disappeared down the local party maw. The workers’ exposure was systematically understated, so that they did their job at the price of a lingering death. (Could they have said no?) Withal, the task was apparently botched: the core was not completely smothered; “the situation” not stabilized.*

  The area around the plant has become a place of fear. Is the fear justified? The definitive answer may not come for decades: low levels of radiation work slowly. Some scientists speak of fifty years. By then all the victims will be dead. The residents of the area have chosen caution and terror. Most have left and not returned; but some never left and some have come back to take advantage of empty land. One such diehard, a woman of sixty-five, reassures herself that she is still feeling fine. She has rules of thumb: plant apple seeds deep in the ground; eat no more than ten kilos of mushrooms; “if you feel too much radiation, you have to drink some vodka.” Her neighbor believes what she sees: “Look at this place. Where do you see any radiation? If anything, this place is better now that there are less people.” And some try to laugh about their plight. They tell the joke about the farmer who is selling apples under a big sign, APPLES FROM CHERNOBYL. “You must be mad,” says a passerby. “No one wants to buy apples from Chernobyl.” “Sure they do,” says the vendor. “Some people buy them for their mother-in-law, others for their wife.”6 (And maybe others for their husband.)

  As a result, although other accidents and natural catastrophes may have cost more lives—the chemical leak at Bhopal, India, in 1984, perhaps—none has been more damaging to reputation and prestige.† Repugnance and repudiation were in direct proportion to the technological arrogance and gigantism that inspired and sanctified Soviet programs and projects.7 The socialist command economy was tarred with incompetence, credulity, stupidity, and indifference to the public weal—among other sins—the more so because of clumsy attempts at concealment and mitigation. “It is now clear that the political repercussions from Chornobyl accelerated the collapse of the Soviet empire.”8