To have a free and prosperous country, it is important to have strong institutions underpinning things like contract and property rights. Yet all too often we forget the roll of social attitudes and world-view in creating wealth and its handmaiden, liberty.
There are two interesting articles in The Telegraph today (on the same page in the print version in fact) that shows that places like Russia and China may be vastly wealthier and freer than they were under the darkest days of Communism, but both those places have yet to develop either a culture that expects liberty, understands the implications of state money (they are hardly alone in that) or accepts the usefulness of profound outside influences.
The Chinese government is trying to lure foreign educated Chinese back to China, which suggests at least the people at the top are aware that there is value in the way the rest of the world does things..
Under the government’s new incentives, returnees will be able to work wherever they like, regardless of which city they have a residence permit for, and will be offered higher pay, while their families will receive preferential treatment.
Which is interesting as that means most people still cannot live and work where they like, requiring internal passports and state residence permits. How can a place with such restrictions on a person’s ability to sell their own labour ever hope to become affluent and truly dynamic? Can they not see the link between the ability of individuals to make fundamental choices and the effectiveness of markets?
Those graduates who return, expecting their foreign education and work experience to be a passport to a glittering future in the new China, frequently face discrimination rooted in a deep-seated distrust of those who have left the motherland for the West.
Which makes me wonder, do most Chinese people not realise how much more affluent the First World is than they are? I am guessing they do but this is trumped by the cultural imperative for Chinese-ness… the sort of mindless nationalism that is thankfully largely dead in much of the Western world. This suggests to me that regardless of how China’s leaders tinker around, if Chinese culture is that obsessed with China-is-always-best attitudes, there are serious limits to their ability to grow into a prosperous and civil society.
Also in Russia, most of the institutions associated with advanced nations (courts, property rights, contract law etc.) are not known for their robustness or independence from politics. But also I wonder how much the culture in Russia allows people to imagine things any differently?
Russia’s ageing but revered scientific geniuses are on a collision course with Vladimir Putin after the 1,200-member Academy of Sciences rejected Kremlin proposals to end its unique independence from state control […] Now, however, its autonomy is threatened by a proposed new charter which would give the government control of its management, funding and multi-billion pound property holdings. Kremlin officials claim the institution needs dragging into the modern world to harness its members’ brainpower for lucrative scientific patents and commerce. But critics fear it will fall victim to Mr Putin’s appetite for control and his distrust of free-thinking institutions.
Which is interesting. But then…
The Academy receives £870 million in federal grants, owns about 400 affiliated institutes and employs around 200,000 people across Russia. Prof Valery Kozlov, 57, its vice-president, said: “This is simply an attempt to seize control of our finances and property.”
I am sure Professor Kozlov is a very smart man, yet I wonder if it even crossed his mind that perhaps his Academy should respond to Putin’s power grab by refusing to take any more state money. If they are a centre of excellence as claimed, surely there must be companies and institutions around the world which would love to fund them and allow them to be truly independent of the state.
Yet the notion that everything must happen top-down with the blessing of the state is probably so deeply ingrained that the reality of what is involved with making yourself independent does not track at all.
Which is interesting as that means most people still cannot live and work where they like, requiring internal passports and state residence permits. How can a place with such restrictions on a person’s ability to sell their own labour ever hope to become affluent and truly dynamic?
I can’t answer that, but there’s a fairly obvious reason why China’s government wants to keep these old restrictions in place.
Throughout the Third World, around almost all the major metropolises — from Buenos Aires to Bombay to Brazzaville — there are huge shanty-towns containing millions and millions of poor people without basic sanitation and without any legitimate ownership of the land they’re sitting on. No one shipped the people there against their will, of course — in almost all cases, they were drawn there by the prospect of getting better wages than back out in the countryside, or at least the prospect of better begging. Many of them turn out to be wrong. But nevertheless, the existence of these immense slums is a nontrivial political problem for all these governments, because it’s a huge agglomeration of poor people who get sick and die all the time, and often have children who are unable to get regular work and contribute cannon-fodder to criminal gangs and whatnot. There’s a number of books written on these wretched slums, often berating the governments involved (and, where possible, past western colonial governments) for failing to provide sewage and roads and public education and all that for these vast illegal squatter shanty-towns.
China is already, apparently, developing this kind of problem around Shanghai (partly through illegal migration, I understand). And they would rather not have more of it. It’s easier for them to clamp down on the number of people coming into their rising metropolises than it is for them to go in afterwards and try and lay down sewage lines and roads and so on, well after the squatters have already come in and started building dystopian walled cities of Kowloon and all.
So it might retard their development somewhat, but they have what I think of as a legitimate reason to be wary of allowing unrestricted internal migration.
Surely the problem there is encouraging private investors to get involved with a concern that the Kremlin has an interest in, vis the recent fiasco with BP (or was it Shell?) on their eastern coast where the Kremlin ‘took’ an increased share of a joint exploration venture as compensation for ‘environmental damage’.
Taeyoung, the problem in Brazil isn’t internal immigration, it’s the corruption and lack of secure property rights in the countryside and stifling bureaucracy in the cities. Those are the things creating the cesspools that surround our cities. People end up living like that because they can’t start legitimate businesses (so they start illegitimate ones instead) because the states gets in the way in more ways than you can count.
Slums happen because there are institutional structural things that make them happen. It’s not a market failure, it’s a failure to have a proper market. Restricting internal movement of people is treating the wrong problem and just jamming up yet another market (labor).
I will mention again the aricle in Foreign Policy by Llosa about the rise of socialist demagogues in Latin America, and their deluded apologists in the west. One of the factors he mentions in this resurgence of collectivism is the dissatisfaction of various populations with recent experiments in democratic and free market policies.
But, as in the supposed problems with these reforms in Russia and China, very little actual freedom from government interference, and unregulated economic activity, has been allowed, and the political systems are still controlled by oligarchies of money, family, and political connections.
An economics professor named Peters published some work a few years ago in which he listed seven basic social characteristics which enable progress in a modern economy. These were simple, and, to us, obvious things such as observance of the rule of law, accounting transparency, respect for property rights and patents, etc.
Much like the four rules for personal success, (finish high school, don’t get pregnant, no drugs, no criminal or gang activity) these ideas are well known, and do not require high-tech gadgetry or sophisticated computer programs measuring dozens of obscure economic indicators. They are as basic as “no corruption in the issuance of licenses and permits, or the enforcement of laws”.
The difficulty that so many cultures based on authoritarian, feudal, oligarchic structures in both their social and economic spheres have with these rules is that they require people holding powerful advantages to let them go.
This is not merely a practical, but also a profoundly moral requirement. Alas, moral behavior is not the strong suit of the rich and powerful any more than it is of the poor and weak, (contrary to the tenets of liberation theology), and the abuse of entrenched power is the achilles heel of many of the economies which appear, on the surface, to be making rapid gains.
An analysis of the Chinese economy, for example, has found that the great majority of the “new millionaires” being produced by its economic expansion are the children or closely related family members of the ruling Party officials. There are similar complaints about the new class of movers and shakers in Russia, who have some unusually close relationships with high government officials.
The sorts of dislocations this type of “crony capitalism” ends up creating in an economy are well documented, and were major factors in the recent decade long recession in Japan, caused in large part by the repeated rollovers given to bad loans held by “connected” individuals and companies, based on illusory collateral, and poured into failing businesses which could never repay them.
My own long term concern is not the popular “China is coming” scare so often talked about recently, or the resurgence of the moribund EU economies, but the seemingly relentless slide of the US into an oligarchic feudal structure, in which family and political connections are the ultimate determining factors in attaining economic or political influence, instead of market based success, or the promotion of ideas and policies that gain the rational support of an informed electorate.
Having said that, though, I have the greatest confidence that the younger generations now coming into their own will have the good sense to recognize many of the glaring mistakes of the collectivist policies of the last century, and begin the hard work of repairing the damage.
Just as the rules for personal or social success are not some mystical formula, available only to a chosen few, so the course of the future is not some impenetrable mystery—it belongs to those who know what they are doing, and why, and it will be determined by those with the courage and dedication to do the hard, dirty, never ending work of maintaining the rule of law and the protection of individual liberties.
My children are much better people than I ever was, thank god, and there are many more just like them.
Dynamism is a function of free, creative minds, not slaves frightened that the least mistake will lead to disaster.
Holy crap! I could have a RESIDENCE PERMIT! I’ve never had one of those before! I keep applying for one and getting the run-around!
I can’t get an internal passport either. How am I going to visit Kansas City without one?
I am guessing they do but this is trumped by the cultural imperative for Chinese-ness… the sort of mindless nationalism that is thankfully largely dead in much of the Western world.
Indeed. See the horrifying fascist fable Hero.
I have had direct experience of this too. I had dinner with some Chinese students before Christmas. I have never seen anyone’s face so twisted with rage as that of an otherwise rather beautiful girl, remarking quite by-the-by how she hated it when she met people who thought Taiwan was a separate country.
It is a pity that, though much weaker, nuts nationalism is far from dead in the West. It would be a start to scrap pledges of allegiance.
Taeyoung,
“There’s a number of books written on these wretched slums, often berating the governments involved (and, where possible, past western colonial governments) for failing to provide sewage and roads and public education and all that for these vast illegal squatter shanty-towns.”
You might be interested in Hernando De Soto’s works on this subject which give a very different perspective. It’s not governments or colonialists failure to provide facilities, but property law not fitting the way local people do business. (One of the most fascinating bits was where he examined the early history of the United States and showed that exactly the same shanty towns had existed there, and exactly the same “third-world” problems. He thought the process by which they were assimilated was worth studying.)
Joao identifies correctly that the fundamental problem is property law: that unable to own land or start businesses through the official system they build their own black market, which is hundreds of times less efficient because it is restricted to a local scale, the short-term, and personal connections. Without enforceable long-range property rights they are unable to raise capital on what they own, and without capital, capitalism is dead.
I don’t think it’s greedy legislators or rich businessmen unable to let go of power, but of them not knowing how to fix it. (Quite frankly, we don’t know how to fix it, and our advice to them has been bad.) If they could, they could make far more wealth locally than they can by stealing it. This seems to be derived from the zero-sum fallacy, the belief that there is a fixed amount of wealth to be shared out, and what one gains others lose. Capitalism works by making wealth, and capitalists are never disadvantaged by other people being able to make wealth too. Quite the reverse.
Corruption is a symptom, not a cause. Corruption arises as a result of barriers to market; as a way of getting round them. You can’t get a permit to operate a business through the byzantine bureaucracy? Pay an official to shortcut the process and give you one anyway. You get your business, the official bypasses a bad law, and corruption can be seen to be good. The problem is the law that the corruption is designed to get around. Fighting corruption without fixing the causes of corruption only makes things worse. (An example of us not knowing how to fix the system either.)
Read De Soto. It’s worth it.
Amen to that! Hero is the most odious flick I have ever seen, a nauseating paean to collectivism.
Pa Annoyed: The problem is the law that the corruption is designed to get around.
Absolutely spot on. This is why more government = bad government and why we need Rule of Law, not legislation. Similarly, it is not just law but licenses, permits, gatekeeping and commissioning. UK’s New Labour is such a corrupting influence in the UK, as it gets involved in more projects, construction, “regeneration”, road pricing, ID cards, NHS IT, ‘ity Academies and PFIs with every week that passes. As it directs and decides over ever increasing sums of money, the likelihood that ever increasing sums will be made available to swing such decisions.
Perry, interesting. If you haven’t done so already I strongly recommend you read Mao’s Last Dancer. It is an insight into a world a Western mind cannot properly imagine (thankfully).
Regarding the property rights explanation of the slum problem, slums emerge even when there are property rights, as they did in New York, and in many of the British cities during the early stages of industrialisation — tenement houses and suchlike. I focussed on the squatters here, because they’re typically the ones who end up building shanty-towns on the public garbage heap, or end up building on private property held by absentee landlords, and then end up getting evicted by dogs and paramilitary gangs hired by said landlords. They’re the biggest social problem.
But there are plenty of slums in which legitimate owners took their property, parcelled it up and built (or allowed to be built) shanty towns as well. Property rights won’t magically enable the desperately poor to afford housing with all the bells and whistles that activists whine about governments not providing — it takes time for an economy to rise up, even if you do provide effective property rights. Besides, third world governments are often ill-equipped to provide the santitation services in these areas anyhow.
Furthermore, China, like all countries, is limited by what is politically and — frankly — physically possible at the moment. To talk about China developing an effective property rights regime out in the countryside so the peasants won’t all rush into the cities (where they won’t have property rights either) is nice, but as far as I can see, wholly unrealistic.
First, they don’t seem to have the enforcement infrastructure — competent courts, honest policemen, etc. — that you would need to have in place for a meaningful property rights regime. I don’t think they even have the manpower, in terms of credentials and competence.
China is, in fact, trying to (or pretending to) develop a basic property rights infrastructure. They even passed their first private property law earlier this year (recognising usufructs, though not outright title in fee simple), after five years of debate. But that whole effort is time consuming, and has repeatedly been undercut by Party interference with the courts and watering-down during legislative debate, as various interest groups in the government/Party have to be accomodated. A mature system of property rights is just not within the realm of possibility for China, at least for the immediate future.
Massive internal migration, on the other hand, is the immediate reality they face, even with draconian restrictions on internal travel. And so they’re continuing to clamp down on internal migration.
And again, I do think that’s a perfectly rational path for them to take at the moment. It may be wrong, it may be distorting their labour markets, etc. etc. And it may be inhumane to the people it’s leaving stuck out in the countryside on their collectivised farms. But it’s not an unreasonable position for the government to take.
Thank you, though, for the link to the DeSoto book — I heard about it when it came out, then forgot about it and never bought a copy.
Taeyoung,
I agree with you over what is currently possible for the Chinese, or indeed any other developing nation. It’s not where they are, but the direction they’re travelling in that is the question for me.
But it isn’t simply property rights that matter, they have to be the right property rights. The shanty towns already have an extensive property rights system; but it is a local organic thing, based on a web of unspoken agreements, traditions, markers, alliances, taboos, and individual neighbour-to-neighbour deals. If you go talk to the people in any street, they know perfectly well who owns what: like you know whose driveway not to park your car in front of, or how often you can hold noisy late-night parties and get away with it. But that structure isn’t represented in a corresponding formal legal framework of rights, secure over greater distances and times or that can be bought and sold, and all attempts to introduce structure top-down based on Western lawbooks invariably fail. If you have a local ‘understanding’ that the occasional party ought to be tolerated, but the law sticks its boot in and says you can be prosecuted for a single infringement if anyone complains (or vice versa), it causes friction. People tend to ignore such laws and continue operating their own systems when they can.
DeSoto says that you have to build the law from the ground up, to incorporate all the local ways of doing things.
He also points out that the poor of the developing world has plenty of wealth and assets, in the form of dead capital. DeSoto calculated that their unrecorded property alone amounted to $9.3 trillion, 93 times the total development assistance from all developed countries over the previous three decades, and about the same as the total value of all listed stock exchange companies for the 20 most developed nations at the time. The amount that must be inherent in going-concern businesses and other rights is staggering.
The squatter camps are often some of the biggest financial assets these countries have got: the underpinning of the black economy that keeps all the people alive and breathing, and behind the scenes probably supports the legal sector too, and they could be immeasurable more if only they could find the trick needed to get the system right. Knocking them down or driving them out is absolutely the last thing they should be doing. Their only hope is to somehow integrate them.
I can’t possibly do the book justice here, and the first chapter I posted the link to above only gives a taster. If the book has a fault, it is that while I think it comes close to framing the right question, it doesn’t really answer it. DeSoto’s proposals for solutions seem to me to be still groping in the dark.