[image src=”http://www.darrenkrape.com/wp-content/uploads/2009/09/false-economy-140×217.jpg” align=”left”]

False Economy, a new book by Financial Times writer Alan Beattie is both ambitious in its geographic and historical scope and quite reserved in drawing monumental judgments. Written for a the general reader, it is light on the economic theory and, when raised, explained clearly and succinctly.

The book’s basic treatise could be summarized thus: a nation’s economic fortunes rise or fall based on a wide variety of variables, typically due to domestic actions and often not those promoted by conventional wisdom. Over the course of the book, Beattie rejects many oft-blamed reasons for nations staying poor: religion, culture, natural resources and other such stalwarts. His reasoning is frequently compelling, rarely relying on abstract economic theory, instead elucidating his point through provocatively eye-opening examples.

Efficient Corruption?

[image src=”http://www.darrenkrape.com/wp-content/uploads/2009/09/nyerere.jpg” caption=”Julius Nyerere, former Tanzanian president” align=”right”]

Take corruption: as many non-profits and intergovernmental organizations (such as the World Bank and United Nations) argue, corruption is one of the main reasons why many counties fail to grow. While this is partly accurate, the complete truth is much more complicated. In an early chapter, Beattie asks why Tanzania remained poor under a scrupulously honest leader while Indonesia was relatively enriched under the notoriously corrupt Suharto regime. While he underscores how all corruption is a drain on an economy, he draws a distinction between different types of corruption and how the differences can have a considerable impact on how an economy functions. Although Suharto, a former general, was famously corrupt, he was able to solidify his government’s power across the country, ensuring that the corruption was relatively regularized and efficient. Put simply, you only had to bribe one official to get things moving forward. Coupled with a relatively free market, the corruption acted largely as a consistent tax on business.

In stark contrast, Tanzania’s president, Julius Nyerere, was a former teacher and, by all accounts, an honest leader. He nonetheless presided over a largely collectivist economy permeated by corruption at all levels, ensuring each step forward required yet more pay-offs to corrupt officials. Eventually, each step became sufficiently painful that most people gave up and returned to a meager life of subsistence farming. In both cases, corruption was rife, but in only one example did corruption significantly stifle economic growth.

Other Myths of Development Theory

Beattie efficiently deals with other myths of development theory. If certain religions, as argued of late about Islam, are such barriers to growth (or, inversely, regularly cited as supportive of economic actively, such as Protestantism), why are there so many examples in history of rich Islamic nations and poor Protestant ones? In most cases, Beattie argues that it is necessary to look at the individual actors and the environment in which they are functioning to see the underlying reasons for economic growth or retardation. In one situation where religion (or culture, geography and so on) could be seen as an impediment, in another it may provide a competitive advantage, or, indeed, have little influence at all.

Critique

While each argument is cogent and feels well supported by president day or historical examples, False Economy nonetheless has two flaws. First, the globe-trotting, time-traveling choice of examples lends a certain disjointedness to the narrative. On one page, you could be introduced to such disparate individuals as Russian Tsars, corrupt Indonesian bureaucrats, Argentine plantation owners and English industrialists. The swiftness many of these subjects are raised, used for comparison and discarded can be dizzying and raises concerns that they’ve been cherry-picked from a world of alternative choices. Without greater exposition of each, or preexisting knowledge, the reader is forced to take such comparisons at face value.

The second criticism is that the book never really comes to a cohesive conclusion. While the subtitle of the book, “A Surprising Economic History of the World”, suggests a primary underlying narrative, there is little to tie the various constituent parts together. Each chapter feels only marginally connected to the others, tackling the ascribed subject but never drawing strong or consistent parallels between them (beyond the aforementioned caution against blindly following conventional economic wisdom). Indeed, the brief final chapter introduces another example, a short analysis of the WTO and failed Doha rounds, rather than providing any real conclusion. If anything, in this chapter Beattie acknowledges this lack of clarity, stating, “I don’t know what the exact answers are [to economic growth], but anyone who claims she does should not be trusted.” Stating this point earlier in the book perhaps could have dissipated the nagging question as to when Beattie was going to state his central thesis.

Verdict

Despite these two quite minor criticisms, False Economy is a compelling read, most especially for the numerous gems of insight scattered throughout. I’ve already mentioned a couple here, but there are others well worth highlighting. Below is one of my favorite.

The Danger of Populous Capital Cities

[image src=”http://www.darrenkrape.com/wp-content/uploads/2009/09/washingtondc.jpg” caption=”Pierre L’Enfant’s\ original plan for Washington D.C.” align=”left”]

For most of it’s history, Washington DC was a sleepy backwater, noted more for stifling heat than vibrant culture. Surprisingly, for a country that pioneered democratic governance, the District’s six hundred thousand residents lack voting representation in Congress, largely disenfranchising the city’s population in the federal government. Yet, is it possible that the District’s small population and disenfranchisement actually helped stabilize the greater country?

As Beattie points out, countries where the residents of a nation’s capital city hold disproportionate sway over the central government tend to be much more unstable. Through their votes, or more often mass protests, residents of the capital tend to skew national priorities toward the capital at the expense of the rest of the country. This encourages more people to move to the capital, further distorting the central governments priorities, and the feedback loop strengthens. Examples of this behavior litter history, from the destructive rent-seeking of ancient Rome to the back-and-forth mass protests of modern-day Bangkok. Beattie sums this tendency with the following statistic, “In countries with a history of stable democracy, an average of 23 percent of the urban population lives in the central city; in unstable dictatorships with a history of coups and revolutions, the figure is 37 percent.”

Perhaps unsurprisingly, even autocrats are appreciating the potential benefits of removing a government from undue influence caused by a large population a the capital’s doorstep. Naypyidaw, the newly built capital of Burma, was specifically located outside the relative political ferment of Yangon. Beattie however doesn’t touch on how such moves by dictatorial regimes who use the same strategy to avoid (potentially legitimate) grievances.

Despite the benefits of limiting local influence on a national government, Beattie fortunately (at least for me, a District resident) suggests that the democratic tradition is sufficiently well rooted in the United States that Washingtonians should, finally, be given the vote.

There are plenty of other equally intriguing stories through the book, beyond those mentioned here, so I highly suggest reading False Economy. Don’t expect a well argued plan for economic development and you can sit back and enjoy many clever and unexpected examples from the pages of economic history.