Why doesn’t capitalism flow to poor countries?

Why isn’t 30 percent of the economics profession working on this problem?  Di Tella and MacCulloch tell us the following:

We find anecdotal evidence suggesting that governments in poor
countries have a more left wing rhetoric than those in OECD countries. 
Thus, it appears that capitalist rhetoric doesn’t flow to poor
countries.  A possible explanation is that corruption, which is more
widespread in poor countries, reduces more the electoral appeal of
capitalism than that of socialism.  The empirical pattern of beliefs
within countries is consistent with this explanation: people who
perceive corruption to be high in their country are also more likely to
lean left ideologically (and to declare support for a more intrusive
government in economic matters).  Finally, we present a model explaining
the corruption-left connection.  It exploits the fact that an act of
corruption is more revealing about the fairness type of a rich
capitalist than of a poor bureaucrat.  After observing corruption,
voters who care about fairness react by increasing taxes and moving
left.  There is a negative ideological externality since the existence
of corrupt entrepreneurs hurts good entrepreneurs by reducing the
electoral appeal of capitalism.

Here is the paper.  Here are non-gated versions.

Comments

So voters in poor countries allow themselves to see the effects of crony capitalism in, e.g., Mexico or Russia, but refuse to see the effects of crony collectivism in, e.g., Venezuela or Zimbabwe? Go figure.

Myth of the rational voter indeed...

After working in South Africa for two years as an employee of a fairly wealthy medical systems company, I've become convinced that it's cultural. My only evidence is purely anecdotal, but I'd love to see what someone smarter than me might make of the premise.

In Africa, at least, the problem was the lack of a cultural assumption of win/win situations. Zero sum games are the underlying belief in almost all exchanges, so profitable transactions are all about screwing the other guy. If he's losing, you must necessarily be the winner. If he wins, you must necessarily be the loser.

That's why the leftist rhetoric can take hold. The audience for such arguments knows quite well that they're going to be destroying some vast amount of wealth -- they just consider themselves on the winning side. And they consider it justified because, hey, they were on the losing side against those that were winning for so long. It's just their turn.

There is no cultural assumption that you get rich by making other people better off. Every school kid in America understands this almost instinctively -- it's the dominant cultural phenomenon of Western civilization. But during my time in Africa, it was rare indeed to meet someone at the other end of a trade making a case for how MY life would be better if we did business. Mostly they tried to figure out how I could have no other choice than to deal with them.

Perhaps my own experience created a heavy bias for me.

people who perceive corruption to be high in their country are also more likely to lean left ideologically (and to declare support for a more intrusive government in economic matters

The implications of this statement are staggering. Seriously, what's the rationale behind - "I believe the government is corrupt, therefore I want more government"

The reason 30 percent of economist aren't working on this (which I assume you mean changing the balance of rhetoric and, presumably, attitudes) is that this model explains far less than 30 percent of the problem.

It seems far more plausible that the rhetoric of collectivism is more prevalent in poorer countries because collectivist rhetoric is uniquely helpful to those with dictatorial ambitions, and such ambitions find more fertile ground in countries without institutions that have evolved to check those ambitions.

BTW - the idea that Africans are more collectivist than Americans is, I think, a crock. The average American, even 'conservative' American, responds to politicians promises for "better government" no differently from the average member of the Tswana tribe. Flynn, you should check out Botswana as a counterpart to your experience in S.A.

It is worth noting that the historical reason for apartheid in South Africa was the zero sum attitude of unions regarding jobs, resulting in formal protectionism of skilled whites from the unskilled but cheaper blacks (and other non-whites) that threatened their jobs.

Thus already you have a zero sum attitude in South Africa going back many decades. The Soviet Union backed the ANC which were communists, making it white zero-summers vs black zero-summers, and while they now disavow communism, old attitudes die hard.

I think Tim Lundeen's point also has relevance for immigration policy.

Two great books to read on this: Culture Matters: How Values Shape Human Progress, edited by Lawrence Harrison and Sam Huntington; and The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else by Hernando de Soto (my personal hero). I don't have the time to summarize either of these here but check them out on Amazon - both provide excellent commentary on why capitalism has taken hold so well in certain places but not others.

Do these countries tend to feature government ownership of media sources? Presumably, such media would deliberately reinforce the message that corruption in government is less problematic than corruption in private industry.

In Venezuela, a politician defended the government saying that there is corruption because business people buy burocrats.Another, the Presindent of the country ,said he paid twice the external debt because he was deceived. And he was the most popular president ever in this country.Business peple are foreigners so they are guilty not us, nationals. Business people are rich so they are guilty not us the middle and poor classes that voted corupt politicians into the goverment, and relected them . Corruption was defended by a left wing faculty as a way for redistribution of oil revenues from the goverment to the poor.
Most people in Venezuell use to said " no me den ,ponganme donde haiga", "Dont give me put me where the money is"
Of course ,privatization and a smaller governmet would mean less oportunitties to grab. Or for less people .
like in mexico.

In Argentina, people chanted "Peron sera ladron, pero queremos a Peron. Peron could be a thief but we want Peron

JCM,
You caused me to remember an American politician who was charged and convicted of corruption. He said in his defense that, "Yes I stole, but I stole for you, the people!"

happyjuggler -- let me amend my comments...

You mention temptation as part of incentive model. I agree that it's there. In western culture, we have a traditional cultural counter-incentive: shame. (AKA guilt) People don't generally take advantage of situations where they face temptation out of a sense of innate responsibility to the pattern of civilization. You don't screw the other guy out of money generally because forcing a win/lose scenario isn't the accepted way of doing things.

There, it is. I'm absolutely convinced that this is the differential. A bureaucrat in the 3rd world, *doesn't feel shame in accepting a bribe.* It's not that they do or they don't -- there's plenty of temptation faced by even the most low-level employee at my local DMV. But that person thinks taking a bribe is fundamentally wrong.

Not so in much of the 3rd world. The clerks at the ZA Dept of Home Affairs that took R30000 to give me my work visa considered the transaction PERFECTLY NORMAL. I've seen drug dealers express more nervousness and internal guilt at a sale than the person that took cash to stamp my passport.

Expecting someone to lose in a transaction (in that case, the govt itself) is simply the normal course of life in such an atmosphere. You shafted someone in a business deal? Too bad, way it goes. You stiffed the government of some tax revenue? Too bad, way it goes. You tell a team of employees that doubled your revenue in two years that they get an 8% raise? Too bad, way it goes. When someone's expected to lose in every deal -- this is just the way life works.

At least, that's how I always saw them looking at it. As I said, I wish someone smarter than me would explore the premise.

There, it is. I'm absolutely convinced that this is the differential. A bureaucrat in the 3rd world, *doesn't feel shame in accepting a bribe.* It's not that they do or they don't -- there's plenty of temptation faced by even the most low-level employee at my local DMV. But that person thinks taking a bribe is fundamentally wrong.

Of course, corruption is a very different topic than support for capitalism. If this above statement is true at all, it is only a matter of degree. A few months ago, I read about one of the Oakland DMV branches where several employees were indicted in federal court for selling fake licenses to illegal immigrants. What struck me about this case was that it wasn't simply one or two bad apples but apparently required several people to conspire and others to look the other way. This happens much less than it does in the developing world, no doubt, but is that because Americans are more likely to find this conduct shameful or simply because they are more likely to go to prison if caught?

I've also found in talking to both bribe-takers and bribe-givers in other countries that there is a large element of denial in the whole process. And this is not to mention the fact that corruption is a universal complaint in places where it exists. I think corruption has less to do with lack of shame and more to do with lack of consequences along with the low pay of government employees and an unprofessional working environment in which anyone who adheres to the rules is viewed as an object of suspicion.

I think this explanation for why so many poor countries get stuck in a left wing quagmire supplements William Easterlys explanation for the same phenomenon. In his article titled The Ideology of Development in the June edition of Foreign Policy, Easterly suggests that the paternalistic attempts at imposing market reforms are to blame for the unpopularity of capitalism.

From the article ( http://www.foreignpolicy.com/story/cms.php?story_id=3861 ):

"The “one correct answer† came to mean “free markets,† and, for the poor world, it was defined as doing whatever the IMF and the World Bank tell you to do. But the reaction in Africa, Central Asia, Latin America, the Middle East, and Russia has been to fight against free markets. So, one of the best economic ideas of our time, the genius of free markets, was presented in one of the worst possible ways, with unelected outsiders imposing rigid doctrines on the xenophobic unwilling."

"This sounds like American behavior. White collar crime is rampant, tax evasion is rife, and American companies rarely compensate employees with raises commensurate with revenue growth."

My whole point is that it's considered normal in that environment. Whereas in the OECD countries, people actually complain about it and consider it wrong, as you so clearly suggest in your own response.

I think the real question is why good ideas in general don't flow to poor countries. Why don't people in poor countries look at rich countries and say: "let's shamelessly rip them off and do what they do!"? Why isn't it a winning political program in Africa to say: "elect me and I'll bring in a bunch of Swedes to show us how they do things?" Truly puzzling.

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