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

by David S. Landes

  And what of the poor themselves? History tells us that the most successful cures for poverty come from within. Foreign aid can help, but like windfall wealth, can also hurt. It can discourage effort and plant a crippling sense of incapacity. As the African saying has it, “The hand that receives is always under the one that gives.”20 No, what counts is work, thrift, honesty, patience, tenacity. To people haunted by misery and hunger, that may add up to selfish indifference. But at bottom, no empowerment is so effective as self-empowerment.

  Some of this may sound like a collection of cliches—the sort of lessons one used to learn at home and in school when parents and teachers thought they had a mission to rear and elevate their children. Today, we condescend to such verities, dismiss them as platitudes. But why should wisdom be obsolete? To be sure, we are living in a dessert age. We want things to be sweet; too many of us work to live and live to be happy. Nothing wrong with that; it just does not promote high productivity. You want high productivity? Then you should live to work and get happiness as a by-product.

  Not easy. The people who live to work are a small and fortunate elite. But it is an elite open to newcomers, self-selected, the kind of people who accentuate the positive. In this world, the optimists have it, not because they are always right, but because they are positive. Even when wrong, they are positive, and that is the way of achievement, correction, improvement, and success. Educated, eyes-open optimism pays; pessimism can only offer the empty consolation of being right.

  The one lesson that emerges is the need to keep trying. No miracles. No perfection. No millennium. No apocalypse. We must cultivate a skeptical faith, avoid dogma, listen and watch well, try to clarify and define ends, the better to choose means.

  …I have set before thee life and death, the blessing and the curse; therefore choose life.

  —Deuteronomy 30:19

  Epilogue 1999

  In theory, everything up to now is history. But as every historian knows, the closer one gets to the present, the more uncertain and precarious the story.

  No sooner had I sent in the final text for this volume when the countries of East Asia, featured as big winners in the contest for growth and development, fell into crisis and contraction. The baby tigers—Thailand, Indonesia, Malaysia—went into contagious convulsions. Their better established regional competitors—South Korea, Taiwan, Singapore, and Hong Kong—resisted awhile but then succumbed to investors’ doubts and fears. China—enormous and mysterious—seemed impervious in its relative isolation to market movements; but China’s turn would come. Even Japan—bellwether and second largest economy in the world but strongly linked by export and investment to the region’s emerging economies—saw major sectors such as banking and real estate shudder and stall. For the first time since the oil embargo of the 1970s, this paragon of success saw national product shrink.

  The problem, in a way, was too much success. These economies had grown too fast, had become the focus of a gold rush yielding inebriating rates of profit and spectacular capital gains—the kind of returns that gild a balance sheet in London or New York and promise fast advancement for investment prodigies. But high returns imply/entail high risk, and good businessmen should be as suspicious of spectacular profits as they are alarmed by big losses.1 The basic rule of business, as of physics, is the law of conservation of mass and energy: nothing for nothing. And another law: every action gives rise to reaction, in other words, no bulls without bears. Failure lurks in the shadow of success, in the inevitable, all-too-human excess of greed.

  So with the great East Asian leap forward. In 1993, the World Bank, in a report ebulliently entitled The East Asian Miracle,2 fairly rhapsodized:

  Since the 1960s, the high performing Asian economies have grown more than twice as fast as the rest of East Asia, roughly three times as fast as Latin America and five times faster than sub-Saharan Africa. They also significantly outperformed the industrial economies and the oil-rich Middle East-North Africa region. Between 1960 and 1985, real income per capita increased more than four times in Japan and the Four Tigers [South Korea, Taiwan, Singapore, Hong Kong] and more than doubled in the Southeast Asian NIEs.3

  And to this list should be added China, which finally, in the 1980s, freed itself from some of the toils and servitudes of Marxist ideology and began encouraging enterprise, to the point of inviting in the agents of predatory capitalism. One might have expected these capitalists to be wary of so unsympathetic a regime, but the prospect of over a billion customers (“oil for the lamps of China”) trumped caution, and they accepted conditions more onerous than in other Third World countries. The result: average growth in Chinese GDP 1981-96 of slightly more than 10 percent per annum—if the official figures are to be believed.4

  In 1996, however, came signs of trouble. Anti-Chinese riots in Indonesia told of frictions between the business community and the native Muslim majority. One might have expected the authorities to keep the peace, but no, these were pogroms waged with tacit approval from above and intended to put Chinese merchants and money lenders in their place. It is easier to borrow money than to repay, easier to lend than collect. As the months went by, the IMF not only told Malaysia to cool the overheated economy but also put both Thailand and Indonesia on notice. Caution lights were blinking.

  Then, in 1997, after initial expressions of confidence, came further warnings. The central bank of Thailand labeled some ten finance companies insolvent, and this implied a small throng of pinched debtors. The baht (Thai currency unit) immediately came under attack—holders understandably wanted out—and hit an eleven-year low against the dollar by mid-May. The stock market fell in sympathy, to 17 percent below the year’s start level.

  The weakness of the baht, which had been pegged to the dollar, was an invitation to dump the currencies of the two other would-be tigers, the Malaysian ringgit and the Indonesian rupiah. In many ways both countries, in spite of shiny statistics, were seriously ill, crawling with corruption and caught on a treadmill of easy, insider credit. Once the business community awoke to the risks, and the endless stream of funds abated, foreign speculators jumped ship; indigenous entrepreneurs and investors not only moved funds to safer havens but also deferred commitments, inevitably creating job loss, popular discontent, and political instability.

  Matters were not helped in Malaysia by the ethnocentric reaction of the prime minister, Mahathir bin Mohammad, a militant Islamist who spit at foreign speculators for bringing low the ringgit. He was particularly incensed by alleged Jewish enemies of Islam such as George Soros. It was as if Mahathir had been reading and believing the anti-Zionist twaddle that was one of the Arab Middle East’s most successful products, or perhaps listening to too many Friday sermons, or just expressing irritation at the refusal of foreigners to heel and obey in the same manner that Malays did.5 In any event, such antisemitic foolishness, however plausible in the frontier Islam of a racist society, could only alienate and frighten foreign money men. It did not help the ringgit. In addition, the Malaysian authorities tried to ease the strain of industrial contraction by ordering the Indonesian Gastarbeiter out. Go home! Any jobs, they said, should be reserved to natives. This was the same tactic European countries had used in the 1930s but could no longer get away with. Malaysia, however, had fewer compunctions.

  In Indonesia, more than elsewhere, the link between power and favor was particularly blatant. Normally the state would have bailed out the fat cats, but this time the debts far exceeded the reserves, and much of the debt was denominated in dollars. The best one could do was to slow the decline in the exchange value of the rupiah, keep it high long enough to pay off dollar obligations and enable insider favorites to convert rupiahs into strong currency, and give foreign investors and speculators more time to pull out. Meanwhile the rising price of basic commodities and the stench of corruption inflamed the population against the regime. This time violent repression could not still the populace, and, in the end, Suharto had to resign.

  At first
the older tigers felt superior and pitied the parvenus, but finally they too felt the squeeze. Korea especially suffered the same easy-credit syndrome. A number of major manufacturing enterprises had been rolling over debt, borrowing the while, but now the finance companies found their own money sources drying up. Panic turned into recession; major industries contracted and closed, leaving the usual jobless debris. “Businesses are almost paralyzed,” said the chief representative of an American investment bank in December 1997. “They’re not out there producing and marketing. They’re just trying to get liquidity.”6 Even Singapore and Hong Kong, long seen as paragons, saw their currencies lose value, their stock markets tumble, their guest money men turn or even move away.

  The IMF sought to stem the tide by putting together emergency aid packages: $17.2 billion for Thailand, of which 4 from the IMF; $35 billion for Indonesia, of which 10 from the IMF, 4.5 from the World Bank, and 3.5 from the Asian Development Bank; $57 billion for South Korea, of which 21 from the IMF, 10 from the World Bank, and 4 from the Asian Development Bank. (All these packages included further contributions by creditor nations.) All well and good, but IMF aid came with unpleasant constraints. Beneficiary countries were expected to clean up their finances, tighten credit, stop helping insider favorites, and in all of this, let the IMF see the books. No part of IMF loans could be used to bail out industrial enterprises, long considered sinkholes of favoritism. No part could be used to revive an insolvent financial institution. No part could go to compensate shareholders in these enterprises. Given the suspicions of Malaysia’s Mahathir, one can well understand why no IMF package proved acceptable. As any child can tell you, medicine never tastes good, and some children would rather be sick than swallow.

  Meanwhile, alongside the Asian crisis, the advanced industrial nations were having trouble in Russia, where foolish speculators and banks that should have known better found that even state bonds were not immune to repudiation. (They should have studied history and learned something about tsarist certificates turned into wallpaper.) And as ever, Latin America looked shaky. But so what? Latin America always looked shaky. American financial statesmen congratulated themselves on saving Mexico in 1994 and then again in 1997 and, whistling in the dark, told themselves that the market was sound; all it needed was an occasional transfusion. The IMF to the rescue. The U.S. treasury to the rescue. Who was rescued? First and foremost, American and other foreign lenders and speculators. That made sense: if one didn’t save the lenders, how could they lend again? And who better to save than one’s own people? In January 1999, it was Brazil’s turn. Again, the United States to the rescue. And after Brazil? Why not Mexico again? Or Argentina?

  Japan, however, was more important than all these tremblers combined, and Japan was in trouble. For one thing, the country was closely linked to the others as both supplier and investor. When East Asia swooned, Japan languished. More serious, however, Japan found itself sinking into a structural morass: bad commercial habits, an inefficient banking sector, too easy credit, credulous inflation of property values, bad collection, and much corruption and connection—the kind of thing one can hide or live with during a period of rapid growth and innovation, but not in time of slowdown. Some enterprises responded vigorously, but most firms were stuck with the obligations of consensus, which was easier to achieve in good times than in bad. And all that guidance from above—MITI, the Ministry of Finance: it’s good when it works, but it is not responsive to crisis.

  Some see the recent Japanese recession as a warning of long-run decline, a parallel to Britain’s loss of place toward the end of the nineteenth century. The old ways that had brought success had now turned into impediments. Others reject the analogy, noting that the British economy, even in hard times, had never turned negative (but then again, neither had the British economy ever grown so fast as the Japanese). Still, Britain had not adapted to the new technologies (automobiles, electricity and electronics, numerical controls) so well as the Japanese had. Manufacturing was stronger in Japan. And there was another difference, this time one that should have favored Britain: whereas the British had more or less welcomed immigrants, the Japanese did their best to keep all of them out except for Koreans, who were brought in for dirty tasks and, until recently, fingerprinted and politically segregated. The country didn’t want them marrying or melting into the Japanese bloodstream.

  Comparisons are never perfect. The above analogy intended a link between two nations that had been riding high and then found themselves ill-prepared to deal with new circumstances. The British had adapted poorly to the new technologies of the second industrial revolution. The Japanese were responding ineptly to the follies of prosperity: tiny houses in Tokyo going for millions of dollars, the Imperial Palace and grounds having an imputed value greater than all of California, golf club memberships selling for a million dollars. And against this, central bank discount rates falling close to zero percent and yet people saving. Even if they could afford a large, up-to-date television, where would they put it?

  When the Asian crisis broke in 1997, I thought it very inconsiderate of these countries to make of me an optimistic fool. What unfortunate timing! Some readers rejoiced at my imagined discomfiture: if culture was so important, why were these culturally advantaged societies, these allegedly successful societies, having so much trouble?

  My answer would be that economic prowess has never exempted anyone from the ups and downs of the business cycle, indeed, that success is its own worst enemy and a temptation to greed and folly. Rectifying mistakes has to be painful. Take Thailand: in December 1997, the government finally agreed to close fifty-six of fifty-eight finance companies, but selling the assets of these companies was another matter. Other countries are still trying to put off the most painful liquidations, in part because the losers include very influential people. But this too shall pass, and I would expect that the east Asian and southeast Asian economies will soon resume the path of growth, because they have the skills and are capable of learning. But they will achieve this only on condition that they overcome the racist friction that invites fear, risk avoidance, and even flight. How long will this take? Impossible to say.

  On the other hand, and on reflection, this Asian contretemps implicitly supports the emphasis I would place on the role of the West as the driving force of economic development and modernity. Of all the critical responses to this book, the noisiest and most passionate has been the rejection of what is seen as Western triumphalism, decried and derided as politically incorrect and morally repugnant. This rejection has pursued two principal lines of argument, one based on the alleged past, the other on present prospects. On the alleged past: Europe was a poor latecomer and did not catch up with Asia until about 1800. (To say this, one has to trivialize or ignore European advances made in science and technology since the twelfth and thirteenth centuries, as well as the obvious European advantage in mobility and power since the end of the fifteenth century.)7 This European dominance was shortlived, as shown by the rapid economic growth of East Asia over the last century and culminating in the last third (1960-95).8 That’s where the current Asian debacle comes in. It casts doubt on this fairy-tale reconstruction of the past and should help people avoid the seductions of ideology.

  On present prospects: the Asians, it is said, had developed an ethic of economic enterprise drastically different from the market orientation and criteria followed by the West. Where the West pursues only “selfish” motives of profit and loss, Asia prefers a “sponsored capitalism,” in which government does the larger planning and takes the initiative in sponsoring meritorious branches and enterprises. The East also prefers to work, help, and lend (borrow) through a network of personal and political friends and allies. Credit worthiness is not the point. It is connections that count.

  In all fairness, one should note that such personal ties are not absent from Western enterprise. People everywhere prefer to work with people they know and like. The records of European as well as Asian banking ar
e full of network patterns: Jewish, Calvinist, Greek, Lebanese, Pakistani, Chinese.9 The so-called Asian way of business is not that different from the Western; and insofar as it is different, the current debacle would seem to indicate that it is neither foolproof nor intrinsically superior. Again, a lesson in the dangers of overconfidence.

  Much of this eagerness to cut the West down to size comes from Asian chauvinists. The Japanese in particular requite resentment of military defeat with affirmations of spiritual superiority. But much of the disparagement comes from Western dissenters. Our civilization more than any other generates skepticism and discontent. Some of this reaction is justified by misbehavior; some reflects natural and personal disappointment translated to the larger scene. Such negativism may actually reflect success, for anger thrives on ease.

  What does this mean for the longer future? Some “experts” see the Asian crisis as part of a larger pattern of poisoned globalization, the effect of capitalism gone wild.10 They warn of depression, poverty, war, disease, ecological disaster—the horsemen of the apocalypse. As for me, I haven’t changed my mind and continue to expect the best, however difficult and interrupted. As I confessed above, I’d rather be an optimist than a pessimist.

  Notes

  INTRODUCTION

  1. In “Illogic of Neo-Marxian Doctrine,” p. 107.

  2. Thus Wilson, Rothschild, p. 102.

  3. I am relying here, with some modifications, on bold estimates by Paul Bairoch, “Ecarts internationaux des niveaux de vie avant la Révolution industrielle,” Annales: économies, sociétés, civilisationsthe military hospital in , 34,1 (Jan.-Feb. 1979), 145-71. If one calculates in real terms (PPP), the range in GDP (gross domestic product) is given in Human Development Report 1996 as 80:1. Ram, “Tropics and Human Development,” p. 1.