Food for thought

W hat the wealth of nations is really
built upon

12 December, 2009 | Tim Harford

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It is an old question: why are

some countries rich and others

poor? Sir Partha Dasgupta, a

hugely accomplished economist,

born in Dhaka and educated in

Delhi and Cambridge, is as well

qualified as anyone to come up

with an answer – which he did,

delivering this year’s Royal

Economic Society public lecture.

Dasgupta began by inviting his

audience, many of whom were A-

level students, to consider the

lives of two girls – Becky, an

American, and Desta, an

Ethiopian.

Becky lives in a country with a gross domestic product per head of
$46,000, life expectancy of 78 years and near-universal adult
literacy. GDP per head in Desta’s country is $780; life expectancy
is 53 years, adult literacy 36 per cent, and most women spend
about 15 years bearing or taking care of children, with average
fertility of more than five live births per woman.

Familiar as this sort of data is, the numbers never fail to shock. As
Dasgupta pointed out, Ethiopia is not notably richer than it was
5,000 years ago. Why?

Economists haven’t been short of answers. Rich countries have
more physical capital – better roads, bigger buildings, more
machines. They also have more human capital – their citizens are
better educated and trained, and healthier. And they have more
technological capital, with more scientists, more advanced
technology and more intellectual property.

But these are symptoms of something deeper. After all, as China is
now demonstrating, it is possible to expand all three types of capital
at speed. Many poor countries don’t. Why not?

The fashionable answer is that rich countries have better institutions.
It sounds profound, but nobody really agrees on what it means.
Dasgupta pointed out that in a variety of circumstances – from
buying fresh-seeming food at a supermarket to getting married,
from walking the streets in safety to writing a country’s constitution
– we need to be able to rely on other people to play their part in a
deal that may be explicit but is often entirely implicit. And he
devoted much of his lecture to answering the question of when we
can expect other people to keep to these agreements and quasi-
agreements.

Relying on game theory analysis, Dasgupta reached two
conclusions. The first is that stable societies – that is, where cheats
can be found and punished, if only by a refusal to do business with
them in future – are a precondition for successful institutions. If
every interaction is a one-off, co-operation is impossible, and all
those wonderful investments in machinery, education and innovation
will simply never happen.

The second conclusion was that co-operation is extremely fragile.
Dasgupta’s game theory suggested that even a successful, co-
operative society is always at risk of breaking down. “It is easier to
destroy institutions than to build them,” he argued, and cited the
Watts riots and the decline of many pre-modern civilisations. The
credit crisis is, arguably, another example.

If true, this is very disturbing: it suggests that we should perhaps
spend less effort thinking about how to develop poor countries, and
more effort holding together our own fragile societies.

I was not totally convinced. Perhaps I am complacent, but the past
200 years of economic history contain far more examples of poor
countries becoming rich than of rich countries becoming poor.

As Sir Partha patiently explained his algebra to a gaggle of admiring
schoolchildren, I was left with more questions than answers about
why we trust each other and our institutions, and how such trust is
created and destroyed. That, I think, was exactly his aim.

Tim Harford’s latest book is ‘Dear Undercover Economist’
(Little, Brown)

Courtesy