Notes on Economic Development and Reducing Terrorism

Notes and links for presentation to the Student Conference On National Affairs (SCONA)
Texas A&M University, February 25, 2011

Below are updated notes from my presentation to military students attending the 2011 Student Conference On National Affairs. The theme of the conference was War and Reconstruction and I had been invited as a last-minute replacement speaker. Many links in my original post were broken so I have updated most, deleted some, and added a few. Students researching the 2018-19 immigration, foreign aid, and terrorism policy debate topics should find many article and video links relevant to their research. — Greg Rehmke

1. Terrorism, Communism, and  the Transition

[Added article: How the Soviet Union Transformed Terrorism, The Atlantic, December 23, 2011)]

State-sponsored terrorism was a deeply Soviet phenomenon, but its practice did not stop when the Soviet Union ended. …

Russia is the birthplace of modern terrorism. The Russian nihilists of the 19th century combined political powerlessness with a propensity for gruesome violence, but their attacks were aimed at the Tsarist state and ruling classes. Later, the Soviet Union and its allies actively supported terrorism as a means to politically inconvenience and undermine its opponents. The East German Stasi and the KGB provided funds, equipment, and “networking” opportunities to the myriad of leftist German terrorist cells in the 1960s, 70s and 80s. The Red Army Faction and the 2nd June Movement in Germany, as well as the Red Brigades in Italy, shared Marxist philosophies, a hatred of America, solidarity with the Palestinians, and opposition to the generation, some of its members still in power, that had supported the Nazis and fascists. They were good foundations for a Cold War fifth column. It was not just Europe, either: Soviet equipment, funding, training and guidance flowed across the globe, either directly from the KGB or through the agencies of key allies, like the Rumanian Securitate, the Cuban General Intelligence Directorate.

2. The apparent economic success of the Soviet Union inspired heads of state around the world.

One reason Egypt’s political development was frozen for so long is the lasting influence of Gamal Abdel Nasser (president 1956 – 1970) who allied the country with the Soviet Union and imposed a policy of economic nationalism and statism, and created huge loss-producing state enterprises and a bloated bureaucracy. FEE.org article, 2011, The Roots of Egypt’s Revolt.

One reason Egypt’s political development was frozen for so long is the lasting influence of Gamal Abdel Nasser (president 1956–1970) who allied the country with the Soviet Union and imposed a policy of economic nationalism and statism, and created huge loss-producing state enterprises and a bloated bureaucracy.

Communism and National-Socialism inspired not just Nasser, but also politicians in India, many African countries, Latin America, China, and Southeast Asia. As colonialism ended, State-Owned Enterprises (SOEs) and foreign aid were advised by most development economists. P.T. Bauer was the exception. Also, Polly Hill, an economic anthropologist with her research in Ghana and book, Development Economics on Trial: The Case for a Prosecution.

The Revolution in Development Economics (book link): Asia’s Four Tigers (Taiwan, Singapore, South Korea and Hong Kong) surprised development economics by getting prosperous by not following the advice of development economists.

3. Soviet-Style govt. didn’t work, and neither does state-capitalism (mercantilism)

Hernando de Soto in Globalization at the Crossroads notes that Western Europe and America experienced similar migrations to cities over the last two centuries, and these migrations “broke the back of The Old Order” bringing legal reforms and economic growth.

• Globalization at the Crossroads documentary on FreetoChoose.tv

• Law develops from everyday local commerce, but governments try to overwrite these natural laws and conventions with top-down legislation and regulation.

• Egypt’s Economic Apartheid: More than 90% of Egyptians hold their property without legal title. No wonder they can’t build wealth and have lost hope, (Hernando de Soto, Wall Street Journal, February 3, 2011). Excerpt:

• Egypt’s underground economy was the nation’s biggest employer. The legal private sector employed 6.8 million people and the public sector employed 5.9 million, while 9.6 million people worked in the extralegal sector.

• As far as real estate is concerned, 92% of Egyptians hold their property without normal legal title. …

The entrepreneurs who operate outside the legal system are held back. They do not have access to the business organizational forms (partnerships, joint stock companies, corporations, etc.) that would enable them to grow the way legal enterprises do.

Egypt’s underground economy was the nation’s biggest employer. The legal private sector employed 6.8 million people and the public sector employed 5.9 million, while 9.6 million people worked in the extralegal sector. As far as real estate is concerned, 92% of Egyptians hold their property without normal legal title.

To open a small bakery, our investigators found, would take more than 500 days. To get legal title to a vacant piece of land would take more than 10 years of dealing with red tape. To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.

Article about DeSoto Wall Street Journal article in The Atlantic is here.

• See also: Economist article on DeSoto: The Economist vs. the terrorist. The Other Path: The Economic Answer to Terrorism.

• Waking Dead Capital (Forbes article on Mystery of Capital from 2000)

4. Roots of Egypt’s Revolt (article at The Freeman Online). 2-page handout pdf.

Excerpt “Iraq: Half of the labor force works for the national government, either directly or indirectly,
Egypt: 35% work for the state, 60% of textile mfg. owned by state.”

5. Economics in Iraq: When Freedom is Bad for Business (Atlantic article)Lack of economic freedom in Iraq was a problem under Saddam and a problem in 2011 and a problem today:

But if American imperialism isn’t all that imperialistic, neither is Iraq’s free market very free. It remains hard to open a legal business, difficult to keep one running, and virtually impossible to shut one down. Frank Gunter is an associate professor of economics at Lehigh University and a Marine reservist who served as both deputy chief of coalition operations and the senior economic adviser to the U.S. military in Iraq. He points me to a grim recent study of Iraqi business: “They cannot find evidence that any business has been legally closed in the last 10 years. What they do if they want to close a business is wait until the day before payday, loot everything, and then disappear.”

• McArdle blog post Doing Business in Iraq

6. Classical Liberalism and International Relations by Edwin van der Haar (pdf article) VanderHaarCL-IR

Excerpt: Academic international relations theory is dominated by American-style liberalism,
which has much in common with European…social democracy.
One effect of this is the equation of liberalism with Immanuel Kant and Woodrow Wilson inspired calls for a world federation of the brotherhood of man, cosmopolitanism, a belief in the goodness of people and the possibility of abolishing war optimism about the peace-enhancing outcomes of increased intergovernmental international organisation, international free trade, and so forth.

• After War:The Political Economy of Exporting Democracy by Christopher Coyne (Stanford Univ. Press)

Chapter 1 online, Middle East Policy Council review, Chris Coyne talk at Independent Institute summer seminar in June, 2014:  Chris Coyne | Exporting Democracy (YouTube video) 

• The Undesired Outcomes of Nation Building, (LearnLiberty.org, September 7, 2016)
Chris Coyne on how “hope and progress” nation building distracts and distorts U.S. foreign policy.
(Direct link to short Chris Coyne LearnLiberty.org video.)

Chris Coyne explains that foreign invasions and nation-building often fail because of the “knowledge problem,” where policymakers and military personnel are not aware of the values and culture of the host country—making it very difficult to build a new government structure that internalizes those attitudes and beliefs.

Mismatching incentives can also be problematic for foreign interventions. The incentives of policymakers and government agencies almost always align with self-interest rather than the interests of the invaded country. As a result, the invaded country is a means to an end for policymakers, rather than the end in itself.

Supporters of nation building may have good intentions, but as the study of the knowledge problem and incentives (not to mention prior experience) shows, good intentions often bring abysmal results.

• See also Chris Coyne’s Doing Bad by Doing Good: Why Humanitarian Action Fails (Stanford University Press, 2013).

In place of the dominant approach to state-led humanitarian action, this book offers a bold alternative, focused on establishing an environment of economic freedom. If we are willing to experiment with aid—asking questions about how to foster development as a process of societal discovery, or how else we might engage the private sector, for instance—we increase the range of alternatives to help people and empower them to improve their communities. Anyone concerned with and dedicated to alleviating human suffering in the short term or for the long haul, from policymakers and activists to scholars, will find this book to be an insightful and provocative reframing of humanitarian action.

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Notes on Cities and Economic Development, and Paul Romer’s Charter Cities proposal [Update, Paul Romer is 2018 co-recipient of Nobel Prize in Economics. See, for example, Marginal Revolution post, Why Paul Romer won the Nobel Prize in economics. Here is New York University Paul Romer page.]

Plus: note and links on The Long Divergence, the economic roots of Islamic decline.

1. Edward Glaesner in Triumph of the City outlines the advantages cities offer both in the developed and developing worlds. He argues it is generally better, in China, India, and Africa, to be poor in the city than to be poor in the countryside.

• New York Times review, Feb. 11, 2011

• Economix (NYT) interview with Glaesner, Feb. 15, 2011

• Segment on the Daily Show with Gaesner discussing book

Manhattan Institute: “Glaeser travels through history and around the globe to reveal the hidden workings of cities and how they bring out the best in humankind. Even the worst cities—Kinshasa, Kolkata, Lagos—confer surprising benefits on the people who flock to them, including better health and more jobs than the rural areas that surround them.” (continues…)

“…TRIUMPH OF THE CITY is a masterpiece. Seamlessly combining economics and history, he explains why cities are ‘our species’ greatest invention.’This beautifully written book makes clear how cities have not only survived but thrived, even as modern technology has seemingly made one’s physical location less important.” — Steven D. Levitt, co-author of FREAKONOMICS and SUPERFREAKONOMICS; professor of economic at the University of Chicago

2. Paul Romer argues that Charter Cities could be developed on vacant land to allow rule of law institutions that encourage investment, create jobs, and improve options. Economic prosperity from technology and rules. Douglas North and Mancur Olsen on institutions.

• GlobalEnvision.org page with link to TED talk

• Atlantic Monthly article on Paul Romer (“Politically Incorrect Guide to Ending Poverty”)

• WSJ video segment on Paul Romer and plan for Charter City in Honduras…

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Notes on relevant events in the Lybia, Egypt and Middle East in general

• Economist article on Timur Kuran’s important book The Long Divergence: How Islamic Law Held Back the Middle East.

• Long Divergence Facebook page with notes and links to other reviews.

3.5. Nick Shultz and Arnold Kling, From Poverty to Prosperity.

• First pages available on Amazon.com here.

Our Intangible Riches, a Reason magazine article:

Oil, soil, copper, and forests are forms of wealth. So are factories, houses, and roads. But according to a 2005 study by the World Bank, such solid goods amount to only about 20 percent of the wealth of rich nations and 40 percent of the wealth of poor countries.

So what accounts for the majority? World Bank environmental economist Kirk Hamilton and his team in the bank’s environment department have found that most of humanity’s wealth isn’t made of physical stuff. It is intangible. In their extraordinary but vastly underappreciated report, Where Is The Wealth Of Nations?: Measuring Capital for the 21st Century, Hamilton’s team found that “human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.” Click here for full article

 4. What are the advantages of density?  Specialization, concentration of knowledge, increased scope of trade, reduced transportation costs for workers, goods, and services, more choices for consumers, and for employers, workers and entrepreneurs. Plus environmental benefits as increase agricultural productivity means less farmland.

5. Long-delayed economic growth finally arriving in some of the booming cities of Africa and Latin America. Lima, Peru and Santiago, Chile and Sao Paulo, Brazil are examples in Latin America.

• BBC article here from 2007 on economic growth in Africa.

• Economist article on African economic growth (“Spread the Wealth”)

6. Notes on Africa 

• Study Guide on Africa Public Health debate topic (pdf): AfricaStudyGuideSept27

7. Notes on China

• Instant Cities and the Rise of China article (pdf) (includes recommended movies):  InstantCitiesRiseChina

• Economic Thinking post: China’s Instant Cities: Send Us the Girl Who Can Get Things Done (links to original National Geographic article no longer work).

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Global Cities, Geography, and Economic Development

Notes and links for Houston World Affairs Council Workshop, February 22, 2011

Second Session Notes and links.

Charter Cities Modern, Ancient, Medieval (and Modern-Medieval)

1. Basic economics, division of labor, specialization, and the scope of trade. Rivers and ports play a central role in providing low transportation costs for goods and people. So cities usually developed along rivers or near deep-water ports.

2. The geography of development in the ancient world. Greek colonies as the competitive Charter Cities of the ancient world. Greek institutions favored commerce. (Further discussion in Property Rights and Law Among the Ancient Greeks). Greek ocean trade led to trading posts and then cities around the Mediterranean and Black Seas. Most were originally colonies with constitutions or charters from their parent city. This created institutional competition among city-states and colonies, and allowed for successes to be copied (and failures avoided).

Transportation and trading networks are essential to economic development. Expanding the scope of trade over inexpensive sea and river routes encouraged competition and division of labor, specialization, investment, and knowledge flows. Each Greek colony city was trading with tribes in their region, and both absorbing and disbursing knowledge.

3. Fast forward a thousand years…“Trans-national” monasteries through the Middle Ages (which weren’t so “Dark” after the 8th Century).  At its height, 37,000 Benedictine monasteries and: “Every Benedictine monastery was an agricultural college for the whole region in which it was located.”  742 Cistercian Monasteries transferring factory and agricultural knowledge technology across western Europe.  Trade around and between monasteries, along rivers and ports. (Jean Gimpel, The medieval machine: the industrial revolution of the Middle Ages). Also on economic development through the “Dark Ages,” this review of Rodney Stark’s Victory of Reason.

4. The geography of development in the Medieval world.  Italian city states and the Hanseatic League as similar to Charter Cities.  Novgorod the Great vs. Moscow (The Fall of Novgorod the Great). European cities of the Hanseatic League gained charters to protect their commerce from local princes, allowing self-rule, and contract and property law.

• Leonard Liggio article (from talk) on the Hanseatic League)(pdf):  LPL-HanseaticLeague

5. Amsterdam became a global city through religious tolerance, open trade, investment, and migration. “The Causes of Economic Growth” article by Beuven Brenner (pdf here). “The histories of Hamburg, Hong Kong, Singapore, Taiwan, and West Germany have much in common with Amsterdam’s, but shared religion is not a factor. In each of those places, the state provided an umbrella of law and order, exacted relatively low taxes, and gave people a stake in what the business soci- ety was doing—thereby attracting immigrants and entrepreneurs from around the world.”

6. Some Medieval cities survived the Middle ages. Rick Steves “Little Europe: Five Microcountries”: Andorra, Liechtenstein, Monaco, San Marino. (video on Hulu here)  Microcountries or Charter Cities?

6.5 The recent success of Estonia. Story of Estonia’s escape from Soviet control in The Singing Revolution (website with trailer and educational materials). First (modern) Estonian Prime Minister on economic reforms that led to rapid development: “The Estonian Economic Miracle”. Mart Laar blog.

7. New city-states from regional conflicts from the fall of the USSR, might succeed (and might not):  Albania, Moldova, Georgia, Crimea. (See Startup Cities and Refugee Cities sites.

See Michael Strong presentation from 2013 Voice and Exit: Michael Strong: Startup Cities (YouTube)

And see UFM presentation: Startup Cities: A New Approach to Reform