Category Archives: Development Economics

Best Books of 2018: Factfulness

Re-posted from cei.org.

Review of Factfulness: Ten Reasons We’re Wrong About the World-and Why Things Are Better Than You Think (Flatiron Books, 2018) by Hans Rosling with Ola Rosling and Anna Rosling Rönnlund.

Think Julian Simon, Matt Ridley, and Steven Pinker’s data-driven optimism, mixed with Michael Shermer and Bryan Caplan’s awareness of human cognitive biases, as told by a kindly, avuncular Norwegian. The book reads easily, is visually savvy, and has a friendly, non-polemic tone.

Rosling, who passed away of cancer while writing this book, wanted it to be his last, grand statement. He wants people to simultaneously believe two things: that the state of the world can be both bad and getting better. Hundreds of millions of people still live in absolute poverty. But for the first time in history, the global absolute poverty rate is now below 10 percent. Improvement is coming so fast that the number of people in poverty is going down even as population increases.

Most people think in binaries—left and right, good and bad, and so on. Rosling encourages nuance. Rather than a simple binary of rich and poor countries, Rosling uses a four-level framework. Level one is absolute poverty—subsistence farming, little or no electricity, crude sanitation, high disease rates, and low life expectancy. Level four is where the rich countries are—the Anglosphere, most of Europe, and the Asian tigers. When people think of rich and poor countries, they tend to think of either level one or level four countries. As it turns out, most people in the world are middle class—they live in level two and level three countries. In varying degrees, these countries offer better health and sanitation than level one countries, along with some industrial development, education for children instead of labor, some degree of political and lifestyle freedom, and so on.

One thing I especially like about Rosling’s framework is that countries can level up. Prosperity is a process, not an on/off switch. And the number of levels is theoretically infinite. Rosling chose to use four levels, but a more granular analyst can use as many levels as they want. More importantly, it may well be that what Rosling describes as a level four country today will be startlingly poor a century from now. Most of the world will have leveled up to the equivalent of level five or higher.

Rosling also provides an important public service in teaching people how to look at data. The most important example is the lonely number fallacy:

Never believe that one number on its own can be meaningful. If you are offered one number, always ask for at least one more. Something to compare it with. Be especially careful about big numbers. (p. 130)

I used this advice in my review of Trump economic advisor Peter Navarro’s coauthored book with Greg Autry, Death by China. The data won’t allow Navarro and Autry to make the case they want, so they have to resort to trickery:

Navarro and Autry give just such a lonely number when they argue that, “On [President George W.] Bush’s watch alone, the United States surrendered millions of jobs to China.” (p. 10) Let’s give that large, lonely number some company. In January 2001, when Bush took office, the U.S. labor force was 143.8 million people. When his term expired in January 2009, it was 154.2 million people, despite the economy being in recession. The data are here.

So even if “the United States surrendered millions of jobs to China,” those losses were outweighed by gains elsewhere, most of which have nothing to do with trade policy.

Keep this in mind whenever you see a scary number in a news story—if it doesn’t come with company or context, it’s analytically useless at best.

Rosling’s book has been warmly received by a politically diverse audience, and rightfully so. Rosling’s optimism is based on widely available data, not his ideological priors. In areas where the world is not improving, he is quick to point to them as a reform priorities.

More importantly, the data show that the world’s arrows are almost all pointing up. Few people realize this—as Rosling humorously shows, most people perform worse than chimpanzees on a simple multiple choice quiz about human well-being. The errors are not random—they are overly pessimistic in participants across countries and in every demographic category.

Rosling was as effective as anyone in trying to correct pessimistic bias with facts, not least through his easy-to-understand bubble charts. Rosling’s son, Ola Rosling, and daughter-in-law, Anna Rosling Rönnlund, are carrying on his work with their group Gapminder—see, for example, their tour of Dollar Street that shows the various gradations between countries in levels one through four.

Things are bad in many places, but getting better. In fact, for most people in most places, living standards today are the best they’ve ever been. It is up to us to see that the process continues. To do that, we need to be aware of both the facts on the ground and our inborn cognitive biases that prevent us from seeing those facts clearly. From there, action. Use your head, not just your heart. You need both.

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Raise, Don’t Level: New CEI Papers on Inequality and Poverty Relief

Economic inequality is one of today’s defining issues. How to address it? Iain Murray and I offer an unconventional approach in a new two-part CEI study, released today. The first part frames the issue. The title sums it up well enough: People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions. The second part,The Rising Tide: Answering the Right Questions in the Inequality Debate, outlines a concrete policy agenda to make the poor better off.

Anti-poverty activists routinely fret about the ratio between a CEO’s salary and her lowest-paid employee’s, or how the top one percent’s ratio of national income compares to the bottom one percent’s. Instead of mathematical ratios, we encourage activists to focus on human beings. Again, we plead: focus on people, not ratios.

Ratio-obsessed activists from Thomas Piketty to Naomi Klein ignore some obvious questions due to their monomania:

  • How are the poor actually doing?
  • Is their economic situation improving over time?
  • What policies can make the global poor better off over time?

We seek to fill these disappointing gaps. According to nearly all available data, poor people are better off than ever before in human history—keep at it, then! There is still lots to do, but ignoring the accomplishments people have already made, and what can make more accomplishments possible, only hurts the poor.

Over the course of the 20th century, infant mortality went down by more than 90 percent—just think of how many parents’ broken hearts have stayed whole thanks to modern technology and sanitary practices.

Life expectancy improved by 30 years during the 20th century. And that’s not the only type of length modernity has improved: from 1900 to 1950, the average American became three inches taller, thanks to better nutrition, food security, and health care. The process has only continued since then.

Even if it was only the top one percent that enjoyed zero infant mortality, lived a hundred years, and were all seven feet tall, their best efforts could not bias society-wide statistics nearly that much, despite their most conspiratorial plutocratic efforts. This is what mass prosperity looks like.

According to the Swedish economist Max Roser, since 1960 the number of people living in absolute poverty has declined from nearly two billion to about 700 million—a two-thirds decline. And this happened as total world population more than doubled! This is good news. Today’s most important task is to keep this great enrichment going, and to eliminate absolute poverty altogether.

The poor will never have as much as the rich—every curve has a bottom and a top ten percent, and always will. No changing that. But only the hardest heads deny that most poor people today live better lives than their parents or grandparents did—and that future generations can expect this wonderful trajectory to continue, if they’re allowed to.

This is both a reason to celebrate, and a reason to double down. Now that we haveasked the right questions about inequality, the second part of our study, The Rising Tide, seeks to answer them: what policies can continue to make the world’s poor better off?

There are a lot of answers. We don’t pretend to have all of them, but we offer a few. One is an honest price system: runaway-inflation countries such as Zimbabwe and Venezuela are universally poor. Keeping inflation in check and making sure prices convey honest information will help consumers and entrepreneurs make wise decisions that create value for people.

Affordable energy is another answer, allowing everything from clean home heating (natural gas is somewhat cleaner than dung and logs, especially indoors) to more and better transportation choices, which expands employment options.

Any aspiring entrepreneur needs access to capital—Dodd-Frank-style financial regulations openly insult every person trying to escape poverty. So do many governments’ resistance to granting formal property rights to their people.

Another answer—there really are a lot of them, and no single panacea—is occupational licensing reform. There is no legitimate reason for an interior decorator or a hair-braider to undergo hundreds of hours of training in something they already know how to do, in order to do for pay something they can do for free. Nearly a third of American workers require government permission to begin their day’s work. That is ethically wrong, and should be immediately reformed.

Inequality is a complicated issue. Properly addressing it requires both asking and answering the right questions. Ask how real-world people are doing, not abstract income ratios. And ask about policies that can help people escape poverty. The answers are numerous, and Iain’s and my papers do not pretend to have all of them.

But, we humbly submit, a general ethos of not stamping down on impoverished hands would be a good start. It would also be quite a change from current policy in the U.S. and many other countries.

For more, see our papers, People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions, and The Rising Tide: Answering the Right Questions in the Inequality Debate.

Economic Freedom of the World

Non-economists tend to be much more skeptical about economic freedom than economists are. This in itself is a powerful case for free markets. But empirical data present a far richer and more compelling argument in favor of freedom. That’s why I look forward each year to the release of an updated edition of the Economic Freedom of the World report, jointly published by our friends at the Cato Institute and the Vancouver-based Fraser Institute, with help from more than 30 think tanks around the world.

The report is nothing if not thorough. James Gwartney, Robert Lawson, Joshua Hall, and a small army of contributors assemble data on 144 countries, ranging from regulatory burdens to property rights protections to the amount of corruption. In all, each country is measured on 42 variables. Then each country is given a score from 1 to 10. The freer the economy, the higher the score.

If economic freedom had no bearing on wealth creation, then plotting the scores against per capita GDP would show no distinct pattern. It would be a random blob. What the data actually show is anything but random. As it turns out, poor countries all have something in common: little economic freedom. Countries in the bottom quartile of economic freedom have an average per capita GDP of $5,188. They are clustered in the lower left hand side of our graph.

Rich countries all have something in common, too. They have high scores. Countries in the top quartile of economic freedom have an average per capita GDP of $37,691. That extra freedom results in a seven-fold increase in wealth. If you value human well-being, economic freedom is extremely important. People can only prosper if they’re allowed to.

If that seven-fold difference in living standards doesn’t move you at least a little bit at the margin in favor of free markets, you probably have a hard head, a cold heart, or both. It is the difference between modern sanitation and open sewers. It is the difference between having respectable medical care and not. It is the difference between subsistence farming and an industrial/service-based economy.

Gwartney, et al have been putting out Economic Freedom of the World reports since 1996, so by now they some good long-run data. The trends are encouraging on one front: worldwide, economic freedom has been on the rise for some time. In 1980, the global average score was 5.30. By 2010, it rose to 6.83. Eastern Europe, especially the Baltic region, and southeast Asia have been the biggest stars. The world’s two freest economies are Hong Kong (8.90) and Singapore (8.69).

China (6.16) and India (6.42) are slowly moving in the direction of economic freedom – neither is there yet – and as a result, hundreds of millions of people have already been lifted out of poverty. Liberalization is the most effective anti-poverty program the world has ever seen. More would be nice.

Domestically, the situation is less encouraging. Presidents Bush and Obama have sharply increased spending and regulation over the last decade, and have worsened the government’s already poor financial health. The result is that the world’s second freest economy in 2000 fell to 18th in 2010, the latest year for which data is available. America’s score has fallen from 8.65 in 2000 to 7.70 in 2010. It is the first time the U.S. has been outside of the top ten.

The Bush-Obama years have been very bad for economic freedom. There is a lot of regulatory excess to roll back, and a lot of debt to pay off. It will take time to undo all the damage, but it can be done. Perhaps the U.S. can look to the examples set by economically freer countries such as Canada, the UK, Finland, and, surprisingly, Qatar.

From Poor and Sick to Healthy and Rich

Via Russ Roberts, this is an amazing video. I’m always impressed with creative, compelling ways to use data to tell a story. And this story is one of the most important in human history: how most of humanity went from being poor and sick to healthy and rich in just 200 years.

There is still a ways to go. But if past is prologue, I’m optimistic about the future.

Time to Leave Afghanistan

Bill Easterly’s surprisingly Hayekian take on Afghanistan is worth a read:

News sources say that President Obama will choose “escalate” with additional troops for Afghanistan in his speech at West Point tonight. I and many like-minded individuals find this disastrous.

“Like-minded” means that critics of top-down state plans for economic development are also not fans of top-down state plans for military development. If the Left likes the first, and the Right likes the second, that just shows you how incoherent Left and Right are.

Regulation of the Day 64: Starting a Business in Sacramento, California

assembly-line
Sit back and think for a minute about what man has the potential to create. Think about the magnitude of our achievements in just the last century. Life expectancy has doubled. Population has sextupled. For the first time in history, famine is primarily a political phenomenon, not a natural one. The human mind is capable of creating limitless, endless wealth.

Unfortunately, the human mind is nearly as adept at preventing that wealth from being created. Sacramento, California is home to some of the experts.

Katy Grimes researched what it would take to open a small factory there. “By the time I discovered that 22 government agencies would be involved in permitting and licensing, I realized that Sacramento is not an easy place to do business,” she writes.

She’s right. And when doing business is difficult, there is less of it. That means less wealth is created. Opportunities vanish into thin air. One of the tragedies of over-regulation is the amount of wealth, opportunity, and prosperity that never come to pass. Think of how many plants are never opened because of over-regulation. How many jobs are never created. How many products are never invented.

Supporters of strict business regulations say the rules keep people safe. Maybe that’s true. Maybe it isn’t. But they do keep us poorer.

Seems Obvious, Doesn’t It?

Bill Easterly on Afghanistan:

Transitionland had a thoughtful response to my cri de coeur on Afghanistan yesterday. Among her recommendations for improving things:(1) Stop the air strikes that are killing civilians,
(2) Crack down on corrupt contractors to USAID,
(3) Stop supporting Afghan warlords who are homicidal and/or corrupt.

So, after years of experimentation, we can now start applying these subtle, complex lessons:

(1) Don’t kill,
(2) Don’t steal,
(3) Don’t give aid to those who do.