The state as a bandit or why poor countries are poor

Tim Harford, the economist who is known for his best selling book The Undercover Economist has written an interesting piece on why poor countries are poor.

He uses the arguments put forward by the American economist Mancur Olson in his book Power and Prosperity, which looks at the economic effects of different types of government. To quote Olson:

Under anarchy, uncoordinated competitive theft by "roving bandits" destroys the incentive to invest and produce, leaving little for either the population or the bandits. Both can better off if a bandit sets himself up as a dictator - a "stationary bandit" who monopolises and rationalises theft in the form of taxes. A secure autocrat has an encompassing interest in his domain that leads him to provide peaceful order and other public goods that increase productivity. Whenever an autocrat expects a brief tenure, it pays him to confiscate those assets whose tax yield over his tenure is less than their total value. This incentive plus the inherent uncertainty of succession in dictatorships imply that autocracies rarely have good economic performance for more than a generation. The conditions necessary for a lasting democracy are the same necessary for the security of property and for contract rights that generates growth.

I would emphasise the importance of secure property and contract rights, as well as the rule of law. Corruption, which is another way in which agents of the state, in the form of officials and politicians tax businesses and citizens is an obvious deterrent. The fact that corruption is unorganised, or anarchic, in that there is no certainty of knowing how much will be demanded and at what point in a transaction effectively brings in aspects of rule under anarchy as described by Olson. The agents become roving bandits, stealing whatever is possible before the next election, cabinet reshuffle or when they may otherwise fall from grace and be removed from their positions of power.

The path to prosperity is thus about governance, governance and governance. Singapore had an autocratic leader but thanks to excellent governance and sound policies they prospered. South Korea, Japan and Taiwan, did not score as high on governance (corruption and cronyism were problems) but with decent legal systems and sound property rights (and a lot more resources than Singapore) still did well.

Malaysia, with many times Singapore's resources but far worse governed has achieved only a fraction of Singapore's prosperity. Still, a functioning system of commercial law and property rights with some half-decent policies has paid dividends.

The growth of Japan, South Korea and Taiwan were helped by the boom in Europe and US in the 1950's and 1960's; Malaysia and Singapore reaped more or less the same benefit between the 1980's and 2000.

Now with world economy in the doldrums, those who were left behind have to work a great deal harder, if they are to find a path to prosperity.