Why Are We Rich and They Poor?
Mary Anastasia O'Grady wrote in the Wall Street Journal about the findings of the latest Index of Economic Freedom.
"The evidence is piling up that neither government nor multilateral spending on education and infrastructure are key to development. To move out of poverty, countries instead need fast growth; and to get that they need to unleash the animal spirits of entrepreneurs.
The nearby table shows the 2008 rankings but doesn't tell the whole story. The Index also reports that the freest 20% of the world's economies have twice the per capita income of those in the second quintile and five times that of the least-free 20%. In other words, freedom and prosperity are highly correlated.
Why are some countries so poor? Why is the U.S. so much richer than countries like India? Is it because the U.S. gobbles up the wealth of the world and doesn't play nice with other countries? Not really, no.
In "Narrowing the Economic Gap in the 21st Century," Stephen Parente, associate professor of economics at the University of Illinois at Urbana-Champaign, debunks several World Bank myths by showing that it is not the resources -- land, workforce and capital -- of an economy that play the most important role in explaining higher income countries. Instead it is "the efficiency at which a society uses its resources to produce goods and services."
Mr. Parente cites the microeconomic research of McKinsey Global Institute, which estimates that modern industry in India could take a huge bite out of its productivity gap with U.S. competitors by simply upgrading production techniques. India doesn't need another multilateral education project. It needs to tap into knowledge already available in successful economies -- the information and technology is out there. The trouble is that it is unavailable in many countries like India, because government barriers and constraints to limit competition make access difficult or impossible.
In other words, the U.S. is richer because American workers do more with what they have, not because they have more to do something with.
Don Boudreaux puts it quite nicely.
As Julian Simon taught us, the ultimate resource is the free human mind. A land rich in petroleum, arable land, and iron ore and other minerals is useless to a society of humans incapable of rational thought and intolerant of change. Nor would such a land of potential plenty realize its potential if its inhabitants are restrained by tyranny or by widely shared misconceptions that individual enterprise, innovation, profit, and the pursuit of worldly pleasures are degrading or sinful.
But unleash people from the countless foolish and rent-seeking constraints imposed by government and from constraints imposed by their own superstitions and they will create resources. They will flourish and prosper, not only materially but also culturally and intellectually. A free people can and will build a dynamically prosperous society in even relatively barren and inhospitable places such as New England, Arizona, and Hong Kong. An unfree people will languish in poverty even in lush paradises such as much of Central and South America and in lands teeming with 'natural' resources such as Congo and Russia.