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March 2006

Why Poor Countries Are Poor

The clues lie on a bumpy road leading to the world’s worst
library.

Tim Harford

They call Douala
the “armpit of Africa.” Lodged beneath the bulging shoulder of West
Africa, this malaria-infested city in southwestern Cameroon is humid,
unattractive, and smelly. On a torrid evening in late 2001, I was guided
out of the chaotic Douala International Airport by my friend Andrew and
his driver, Sam, who would have whisked us immediately to the cooler
hillside town of Buea if Douala were at all conducive to being whisked
anywhere. It isn’t. Douala, a city of 2 million people, has no real
roads.

A typical Douala
street is 50 yards wide from shack to shack. It’s packed with street
vendors, slouched beside a tray of peanuts or an impromptu plantain
barbecue, and with little clusters of people, standing around a motorbike,
drinking beer or palm wine, or cooking on a small fire. Piles of rubble
and vast holes mark unfinished construction or demolition work. Along the
middle is a strip of potholes that 20 years ago was a
road.

Down that strip
drive four streams of traffic, mostly taxis. The streams on the outside
are usually made up of cabs picking up fares, while the taxis on the
inside weave in and out of the potholes and other cars with all the
predictability of ping pong balls in a lottery machine. Douala used to
have buses, but they can no longer cope with the decaying roads. So the
taxis are all that’s left: beaten-up old Toyotas, carrying four in the
back and three in the front, sprayed New York yellow, each with a unique
slogan: “God Is Great, ” “In God We Trust,” “Powered by God, ” “Toss
Man.”

Nobody who sees a
Douala street scene can conclude that Cameroon is poor because of a lack
of entrepreneurial spirit. But poor it is. The average Cameroonian is
eight times poorer than the average citizen of the world and almost 50
times poorer than the typical American. And Cameroon is getting poorer.
Can anything be done to reverse the decline and help Cameroon grow richer
instead?

That’s no small
question. As the Nobel laureate economist Robert Lucas put it, “The
consequences for human welfare involved in questions like these are simply
staggering: Once one starts to think about them, it is hard to think about
anything else.”

The
Missing Jigsaw Piece

Economists used to
think wealth came from a combination of man-made resources (roads,
factories, telephone systems), human resources (hard work and education),
and technological resources (technical know-how, or simply high-tech
machinery). Obviously, poor countries grew into rich countries by
investing money in physical resources and by improving human and
technological resources with education and technology transfer
programs.

Nothing is wrong
with this picture as far as it goes. Education, factories, infrastructure,
and technical know-how are indeed abundant in rich countries and lacking
in poor ones. But the picture is incomplete, a puzzle with the most
important piece missing.

The first clue
that something is amiss with the traditional story is its implication that
poor countries should have been catching up with rich ones for the last
century or so—and that the farther behind they are, the faster the
catch-up should be. In a country that has very little in the way of
infrastructure or education, new investments have the biggest
rewards.

This expectation
seems to be confirmed by the experience of China, Taiwan, and South
Korea—not to mention Botswana, Chile, India, Mauritius, and Singapore.
Fifty years ago they were mired in poverty, lacking man-made, human,
technical, and sometimes natural resources. Now these dynamic countries,
not Japan, the United States, or Switzerland, have become the
fastest-growing economies on the planet.

Since technology
is widely available and increasingly cheap, this is what economists should
expect of every developing country. In a world of diminishing returns, the
poorest countries gain the most from new technology, infrastructure, and
education. South Korea, for example, acquired technology by encouraging
foreign companies to invest or by paying licensing fees. In addition to
the fees, the investing companies sent profits back home. But the gains to
Korean workers and investors, in the form of economic growth, were 50
times greater than the fees and profits that left the country.

As for education
and infrastructure, since the returns seem to be so high, there should be
no shortage of investors willing to fund infrastructure projects or lend
money to students (or to governments that provide education). Banks,
domestic and foreign, should be lining up to lend people the money to get
through school or to build a new road or a new power plant. In turn, poor
people, or poor countries, should be very happy to take out such loans,
confident that investment returns are so high that the repayments will not
be difficult. Even if, for some reason, that didn’t happen, the World
Bank, established after World War II
with the express aim of providing loans to countries for reconstruction
and development, lends billions of dollars a year to developing countries.
Investment money is clearly not the issue; either the investments are not
being made, or they are not delivering the returns the traditional model
predicts.

A
Theory of Government Banditry

As our car slowly
bumped and lurched through the crowds, I tried to make sense of it all by
asking Sam, the driver, about the country.

“Sam, how long was
it since the roads were last fixed?”

“The roads, they
have not been fixed for 19 years.”

President Paul
Biya came to power in November 1982 and had been in office for 19 years by
the time I visited Cameroon. Four years later, he is still in power. He
recently described his opponents as “political amateurs”; they are
certainly out of practice.

“Don’t people
complain about the roads?”

“They complain,
but nothing is done. The government tells us there is no money. But there
is plenty of money coming from the World Bank and from France and Britain
and America—but they put it in their pockets. They do not spend it on the
roads. ”

“Are there
elections in Cameroon?”

“Yes! There are
elections. President Biya is always re-elected with a 90 percent majority.
”

“Do 90 percent of
people vote for President Biya?”

“No, they do not.
He is very unpopular. But still there is a 90 percent majority.
”

You do not have to
spend a long time in Cameroon to realize how much people resent the
government. Much of government activity appears to be designed expressly
to steal money from the people of Cameroon. According to the global
watchdog Transparency International, Cameroon is one of the most corrupt
countries in the world. I was warned so starkly about government
corruption, and the likelihood that officials at the airport would attempt
to relieve me of my wad of West African francs, that I was more nervous
about that than the risk of malaria or a gunpoint mugging in the back
streets of Douala.

Many people have
an optimistic view of politicians and civil servants—that they are all
serving the people and doing their best to look after the interests of the
country. Other people are more cynical, suggesting that many politicians
are incompetent and often trade off the public interest against their own
chances of re-election. The economist Mancur Olson proposed a working
assumption that government’s motivations are darker still, and from it
theorized that stable dictatorships should be worse for economic growth
than democracies, but better than sheer instability.

Olson supposed
that governments are simply bandits, people with the biggest guns who will
turn up and take everything. That’s the starting point of his analysis—a
starting point you will have no trouble accepting if you spend five
minutes looking around you in Cameroon. As Sam said, “There is plenty of
money…but they put it in their pockets.”

Imagine a dictator
with a tenure of one week—in effect, a bandit with a roving army who
sweeps in, takes whatever he wishes, and leaves. Assuming he’s neither
malevolent nor kindhearted, but purely self-interested, he has no
incentive to leave anything, unless he plans on coming back next year. But
imagine that the roaming bandit likes the climate of a certain spot and
decides to settle down, building a palace and encouraging his army to
avail themselves of the locals. Desperately unfair though it is, the
locals are probably better off now that the dictator has decided to stay.
A purely self-
interested dictator will realize he cannot destroy the
economy and starve the people if he plans on sticking around, because then
he would exhaust all the resources and have nothing to steal the following
year. So a dictator who lays claim to a land is a preferable to one who
moves around constantly in search of new victims to plunder.

I cannot confirm
that President Biya fits Olson’s description of a self-interested
dictator. But if he did, it wouldn’t be in his interest to take too much
from the Cameroonian people, because then there would be nothing to take
next year. As long as he feels secure in his tenure, he will not wish to
kill the golden goose. Like the virus whose very existence relies on the
bodies it afflicts, Biya would have to keep the Cameroonian economy
functioning in order to keep stealing from it. This suggests that a leader
who confidently expects to be in power for 20 years will do more to
cultivate his economy than one who expects to flee the country after 20
weeks. Twenty years of an “elected dictator” is probably better than 20
years of one coup after another.

Staying with the
simplifying assumption that Biya has absolute power over the distribution
of Cameroon’s income, he might decide to steal, say, half of it every year
in the form of “taxes” that go into his personal bank account. That would
be bad news for his victims, of course, but also bad news for Cameroon’s
long-term growth. Think of a small business owner considering an
investment of $1,000 in a new power generator for his workshop. The
investment is expected to generate income of $100 a year. That’s 10
percent, a pretty good return. But since Biya might take half of it, the
return falls to a much less attractive 5 percent. The businessman decides
not to make the investment after all, so he misses out and so does
Biya.

Olson does
not predict that stable dictatorships will do good things for their
countries, just that they’ll damage the economy less than unstable ones.
Of course, Biya might make his own investments—for instance, providing
roads or bridges to encourage commerce. While they would be expensive in
the short term, they would help the economy to prosper, leaving Biya with
more opportunities to steal later. But the flip side of the businessman’s
problem applies: Biya would be stealing only half of the benefits, not
nearly enough to encourage him to provide the infrastructure that Cameroon
needs.

When Biya came to
power in 1982, he inherited colonial-era roads that had yet to fall apart
completely. If he had inherited a country without any infrastructure, it
would have been in his interest to build it up to some extent. Because the
infrastructure was already in place, Biya needed to calculate whether it
was worth maintaining, or whether he could simply live off the legacy of
Cameroon’s colonial rulers. In 1982 he probably thought the roads would
last into the 1990s, which was as long as he could reasonably have
expected to hold onto the reins of power. So he decided to live off the
capital of the past and never bothered to invest in any type of
infrastructure for his people. As long as there was enough to get him
through his rule, why bother spending money that could otherwise go right
into his personal retirement fund?

Bandits,
Bandits Everywhere

But
perhaps Biya is not in control as much as it first appears. A little
traveling in Cameroon reveals that whether or not Biya is the
bandit-in-chief, there are many petty bandits to satisfy.

If you want to
drive from the town of Buea to Bamenda, farther north, the most popular
way to make the trip is by bus; minibuses ply all long-distance routes in
Cameroon. Designed to seat 10 people in comfort, they will depart as soon
as 13 paying passengers have boarded. The relatively capacious seat beside
the driver is worth fighting for. The vehicles are old bone-shakers, but
the system works pretty well. It would work a lot better if not for all
the roadblocks.

Bullying
gendarmes, often drunk, stop every minibus and try their best to extract
bribes from the passengers. They usually fail, but from time to time they
become determined. My friend Andrew was once hauled off a bus and harassed
for several hours. The eventual pretext for the bribe was his lack of a
yellow-fever certificate, which you need when you enter the country but
not when riding a bus. The gendarme explained patiently that Cameroon had
to be protected from disease. The price of two beers convinced him that an
epidemic had been prevented, and Andrew caught the next bus, three hours
later.

This is even less
efficient than Mancur Olson’s model predicts. Olson himself would have
admitted that his theory in its starkest form underestimates the damage
that bad governments inflict on their people. Biya needs to keep hundreds
of thousands of armed police and army officers happy, as well as many
civil servants and other supporters. In a “perfect” dictatorship, he would
simply impose the least damaging taxes possible in whatever quantity was
necessary and distribute the proceeds to his supporters. This approach
turns out to be impracticable, because it requires far more information
about and control over the economy than a poor government can possibly
muster. The substitute is government-tolerated corruption on a massive
scale.

The corruption is
not only unfair; it is also hugely wasteful. Gendarmes spend their time
harassing travelers in return for modest returns. The costs are enormous.
An entire police force is too busy extracting bribes to catch criminals. A
four-hour trip takes five hours. Travelers take costly steps to protect
themselves: carrying less money, traveling less often or at busier times
of the day, bringing extra paperwork to help fend off attempts to extract
bribes.

The blockades and
crooked police officers comprise a particularly visible form of
corruption, but there are metaphorical roadblocks throughout the
Cameroonian economy. To set up a small business, an entrepreneur must
spend on official fees nearly as much as the average Cameroonian makes in
two years. To buy or sell property costs nearly a fifth of the property’s
value. To get the courts to enforce an unpaid invoice takes nearly two
years, costs more than a third of the invoice’s value, and requires 58
separate procedures. These ridiculous regulations are good news for the
bureaucrats who enforce them. Every procedure is an opportunity to extract
a bribe. The slower the standard processes, the greater the temptation to
pay “speed money.”

Inflexible labor
regulations help ensure that only experienced professional men are given
formal contracts; women and young people have to fend for themselves in
the gray market. Red tape discourages new businesses. Slow courts mean
that entrepreneurs are forced to turn down attractive opportunities with
new customers, because they know they cannot protect themselves if they
are cheated. Poor countries have the worst examples of such regulations,
and that is one of the major reasons they are poor. Officials in rich
countries perform these basic bureaucratic tasks relatively quickly and
cheaply, whereas officials in poor countries draw out the process in hopes
of pocketing some extra cash themselves.

Institutions
Matter

Government
banditry, widespread waste, and oppressive regulations are all elements in
that missing piece of the puzzle. During the last 10 years or so,
economists working on development issues have converged on the mantra that
“institutions matter.” Of course, it is hard to describe what an
“institution” really is. It is even harder to convert a bad institution
into a good one.

But progress is
being made. We’ve just seen one kind of institution: business regulations.
Sometimes, it can be improved with simple publicity. After the World Bank
revealed that entrepreneurs in Ethiopia couldn’t legally start a business
without paying four years’ salary to publish an official notice in
government newspapers, the Ethiopian government scrapped the rule. New
business registrations jumped by almost 50 percent
immediately.

Unfortunately, it
is not always so easy to get corrupt governments to change their ways.
Although it is becoming clearer and clearer that dysfunctional
institutions are a key explanation of poverty in developing countries,
most institutions cannot be described with an elegant model like Mancur
Olson’s, or even with careful data-gathering by the World Bank. Most
unhappy institutions are unhappy in their own way.

Such a uniquely
backfiring setup was responsible for the world’s worst library. A few days
after I arrived in Cameroon, I visited one of the country’s most
prestigious private schools—Cameroon’s equivalent of Eton. The school
boasted two separate library buildings, but the librarian was very
unhappy. I soon understood why.

At first glance
the new library was impressive. With the exception of the principal’s
palatial house, it was the only two-story structure on campus. Its design
was adventurous: a poor man’s Sydney Opera House. The sloped roof, rather
than running down from a ridge, soared up in a V from a central valley
like the pages of an open book on a stand.

When you’re
standing in the blazing sunlight of the Cameroonian dry season, it’s hard
to see at first what the problem is with a roof that looks like a giant
open book. But that’s only if you forget, as the architect apparently did,
that Cameroon also has a rainy season. When it rains in Cameroon, it rains
for five solid months. It rains so hard that even the most massive storm
ditches quickly overflow. When that kind of rain meets a roof that is,
essentially, a gutter that drains onto a flat-roofed entrance hall, you
know it’s time to laminate the books. The only reason the school’s books
still existed was that they’d never been near the new building; the
librarian had refused repeated requests from the principal to transfer
them from the old library.

I was tempted to
conclude that the principal was in an advanced stage of denial when I
stepped inside the new library to see the devastation. It was in ruins.
The floor contained the stains of countless puddles. The air carried the
kind of musty smell associated with a damp cave. The plaster was peeling
off the walls. Yet the library is only four years
old.

This is a shocking
waste. Instead of building the library, the school could have bought
40,000 good books, or acquired computers with Internet connections, or
funded scholarships for poor children. Any of these alternatives would
have been incomparably better than an unusable new library. The school
never even needed a new library in the first place—the old library works
perfectly well, could easily hold three times as many books as the school
owns, and is waterproof.

If the library was
such a pointless endeavor, why was it built at all? It’s all too tempting
for the visitor in Cameroon to shrug his shoulders and explain the
country’s poverty by presuming that Cameroonians are idiots. Cameroonians
are no smarter or dumber than the rest of us. Seemingly stupid mistakes
are so ubiquitous in Cameroon that incompetence cannot be the whole
explanation. There is something more systematic at work. We need to
consider the incentives of the decision makers.

First, most of the
senior education officials in northwest Cameroon come from the small town
of Bafut. Known as the Bafut Mafia, these officials control considerable
funds for the education system, which they hand out based on personal
connections rather than necessity. Not surprisingly, the principal of this
prestigious private school was a senior member of the Bafut Mafia. Wanting
to convert her school into a university, the principal needed to build a
library of university size and quality. It was irrelevant to the principal
that the current library was more than sufficient, and that the taxpayers’
money could have been better spent in other ways or by other
schools.

Second, nobody was
monitoring the principal or her spending. Staff members are paid or
promoted not on merit but at the principal’s command. This is a
prestigious school with good conditions for teachers, so staff members
would be particularly eager to keep their jobs, which meant keeping in
good favor with the principal. In fact, the only person able to defy the
principal was the librarian, who was accountable only to the Voluntary
Service Overseas office in London. She turned up after the library was
built but was at least in time to prevent the book collection from being
transferred and destroyed.

Either the
principal was so stupid that she did not realize water ruins books, or she
did not care very much about the books and simply wanted to demonstrate
that the library had some books in it. The second explanation seems more
likely. With the money at her fingertips and nobody to object to the
wastefulness of building a second library, the principal had full control
over the project. She appointed a former pupil of the school to design the
library, probably to demonstrate the quality of education provided by the
school; she did prove a point, although perhaps not the one she intended.
But no matter how incompetent the architect, the flaws in the design would
have been spotted if anybody concerned had a strong interest in making
sure the library functioned as a library. But that was never the prime
concern of anybody with authority. The people in power simply cared about
putting up something that could qualify the school as a
university.

Consider the
situation: money that was provided because of social networks rather than
need; a project designed for prestige rather than use; a lack of
monitoring and accountability; and an architect appointed for show by
somebody with little interest in the quality of the work. The outcome is
hardly surprising: A project that should never have been built was built,
and built badly. The lesson of the story might appear to be that
self-interested and ambitious people in power are often the cause of
wastefulness in developing countries. But self-interested and ambitious
people are in positions of power, great and small, all over the world. In
many places, they are restrained by the law, the press, and democratic
opposition. Cameroon’s tragedy is that there is nothing to hold
self-interest in check.

Does
Development Have a Chance?

Development
specialists often focus on helping poor countries become richer by
improving primary education and infrastructure such as roads and
telephones. That’s surely sensible. Unfortunately, it’s only a small part
of the problem. Economists who have pulled apart the statistics, or
studied unusual data such as the earnings of Cameroonians in Cameroon and
the earnings of Cameroonians who immigrate to the United States, have
found that education, infrastructure, and factories only begin to explain
the gap between rich and poor. Because of its lousy education system,
Cameroon is perhaps twice as poor as it could be. Because of its terrible
infrastructure, it’s roughly twice as poor again. So we would expect
Cameroon to be four times poorer than the United States. But it is 50
times poorer.

More important,
why can’t the Cameroonian people seem to do anything about it? Couldn’t
Cameroonian communities improve their schools? Wouldn’t the benefits
easily outweigh the costs? Couldn’t Cameroonian businessmen build
factories, license technology, seek foreign partners, and make a
fortune?

Evidently not.
Mancur Olson showed that kleptocracy at the top stunts the growth of poor
countries. Having a thief for president doesn’t necessarily spell doom;
the president might prefer to boost the economy and then take a slice of a
bigger pie. But in general, looting will be widespread either because the
dictator is not confident of his tenure or because he needs to allow
others to steal in order to keep their support.

The rot starts
with government, but it afflicts the entire society. There’s no point
investing in a business because the government will not protect you
against thieves. (So you might as well become a thief yourself.) There’s
no point in paying your phone bill because no court can make you pay. (So
there’s no point being a phone company.) There’s no point setting up an
import business because the customs officers will be the ones to benefit.
(So the customs office is underfunded and looks even harder for bribes.)
There’s no point getting an education because jobs are not handed out on
merit. (And in any case, you can’t borrow money for school fees because
the bank can’t collect on the loan.)

It is not news
that corruption and perverse incentives matter. But perhaps it is news
that the problem of twisted rules and institutions explains not just a
little bit of the gap between Cameroon and rich countries but almost all
of the gap. Countries like Cameroon fall far below their potential even
considering their poor infrastructure, low investment, and minimal
education. Worse, the web of corruption foils every effort to improve the
infrastructure, attract investment, and raise educational
standards.

We still don’t
have a good word to describe what is missing in Cameroon and in poor
countries across the world. But we are starting to understand what it is.
Some people call it “social capital,” or maybe “trust.” Others call it
“the rule of law,” or “institutions.” But these are just labels. The
problem is that Cameroon, like other poor countries, is a topsy-turvy
place where it’s in most people’s interest to take actions that directly
or indirectly damage everyone else. The incentives to create wealth are
turned on their heads like the roof of the school library.

Tim Harford, a columnist for the Financial Times, is the author of
The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are
Poor—and Why You Can Never Buy a Decent Used Car! (Oxford University
Press), from which this article is adapted.

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