Monday, September 21, 2009

"The Anarchy of Success"

Two book reviews in one by William Easterly at Aidwatch. The blog summary is here but the long piece is well worth reading.
In development economics beware of
Pattern in the clouds ("Humans are suckers for finding patterns where none really exist, like seeing the shapes of lions and giraffes in the clouds.")
Confirmation Bias ("When the evidence is mixed, we tend to select the parts of the evidence that confirm what we already believe")
Law of Small Numbers ("our tendency to judge performance by too small a slice of experience")

Key conclusions from Easterly:
"One way to escape from the Law of Small Numbers is to seek to explain levels of per capita income already attained today rather than rates of growth. The level of income you have reached today frees you from small numbers because it reflects the outcome of your entire previous growth experience. So let's ask, who are the richest and the poorest countries now, and what is the difference between them? I argued above that the now-rich countries leaped ahead during a long period in which they were more free-trade and free-market (although far from laissez-faire) than the rest of the world. Economists therefore have a much higher degree of consensus on this question—both evidence and intuition suggest that such things as education, private property, contract enforcement, and freedom from government expropriation contribute to economic development.
These findings just confirm the Western consensus around the basic concept of a state shaped by representative democracy, safeguarding individual rights and supplying crucial infrastructure such as transport, while rewarding entrepreneurship and technological creativity. Such common-sense ideas have stood the test of time over the very long run, both in their acceptance by the population in most economically successful societies (compared to their absence and rejection in unsuccessful economies) and in their pragmatic consequences for prosperity (as showed by the comparison to the poverty of states that lack most of the above conditions). Development is too complex to fit these ideas 100 percent of the time, of course—there are authoritarian exceptions like Singapore. China is not yet an exception because its income level is still less than one tenth that of the US. We can conjecture that China's rapid change in income has followed positive changes in individual economic (and even some political) rights."

"Perhaps prosperity is not after all designed from above; perhaps it emerges from below, from the independent actions of many individuals who figure out their own paths."

In the end, Korea didn't need experts like Ha-Joon Chang as much it needed entrepreneurs like Ju-Yung Chung. Chung was the son of North Korean peasant farmers, who had to leave school at fourteen to support his family. He had failed at successive jobs as a railway construction laborer, a dockhand, a bookkeeper, and a deliveryman for a rice shop in Seoul. At age twenty-two, he took over the rice shop, but it failed. He started A-Do Service Garage to do auto repair, which also failed. At age thirty-one in 1946 in Seoul, Chung again started an auto service, which finally became his first successful business. That auto service grew and diversified over the years. It is now known as Hyundai."

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