Thursday, January 14, 2010

The Opportunity Costs of Foregone Economic Growth

Economic growth is great; it brings people out of poverty, so they can have cleaner water, sufficient food, better medicine, and safer cars, as well as less important things, like bigger houses, cool gadgets, and hundreds of channels of television.

The earthquake disaster and its aftermath in Haiti has reminded me of another benefit of growth: it creates resources that can be used to prevent and deal with crises. A wealthier country would have safer, stronger buildings, fewer of which would have collapsed. A wealthier country would have more and better hospitals that could deal with the wounded. A wealthier country would have an airport that could handle the influx of foreign aide without running out of fuel to get the planes back out again. A wealthy country has accumulated physical and human capital that allows it to deal with emergencies, and to better receive help from other countries during emergencies. Haiti's poverty makes disasters more disastrous, makes internal efforts at recovery impotent, and makes foreign aid less effective.

Wealthy countries aren't immune to disasters, of course--thousands died in the U.S. in Hurricane Katrina, and nearly 15,000 died in France in 2003 during a heat wave. These pale compared to the death toll in Haiti, however. Even if an earthquake occurred in, say, San Francisco, I would expect the death toll to be a much smaller fraction of the population than has occurred in Port au Prince.

It's hard to come up with a silver lining for this, but I'll stretch and try. Tyler Cowen suggests that Haiti as we know it is gone. This is a chance to replace its government and other institutions with new institutions that work better, allowing economic growth and a brighter future. It's hard to be optimistic, however. The old government (or what is left of it) surely won't give up power, and it will try to steer any changes in ways that benefit it at the expense of others. Other countries may try to steer the direction of change to their own advantage. Gangs and criminal organizations may try to carve out their own pieces of the country.

Maybe these problems can be overcome, but it's not clear to me what process would lead to better institutions. One possibility is for a country with relatively health institutions to just take over, copying and pasting its legal system and eventually its traditions. Here the problem is how to figure out which country does this. I wouldn't want, say, Venezuela to take over. I'm not even sure I would want the U.S. to try to run things.

Another possibility is for the U.N. or some other international entity to try to redesign their legal and political systems. I can't see this top-down approach working out well. This sort of central planning problem is just too difficult to solve. No, if beneficial change is going to take place, it will have to be from the bottom-up, and gradual. I'm not sure if the political entities involved will allow this.

(Please note that I'm not repeating the stupid claim sometimes made about the success of Japan after World War II. That is, some said that Japan grew so quickly after the war because they were able to replace their old factories and equipment with new ones. This is ridiculous; absent the war and its destruction of capital, they could have had the old factories and the new ones, or they could have torn down the old stuff if necessary. Destruction of capital is not a path to growth. Rather, I am arguing that destroying old and harmful institutions can be beneficial.)

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