Dan Mitchell on how to make nations rich

A present from Dan Mitchell, our man in Washington DC. This mini-documentary from the Center for Freedom and Prosperity Foundation outlines the public policy framework that is necessary for a poor nation to become a rich nation and includes several real-world examples. Small Government Is the Recipe for Creating Rich Nations.

And there is more on bad advice from international bureaucracies.

Unfortunately, the burden of government spending in western nations has metastasized starting in the 1930s. Total outlays now consume enormous amounts of economic output and counterproductive redistribution spending is now the biggest part of national budgets.

But at least western nations became rich first and then made the mistake of adopting bad fiscal policy (fortunately offset by improvements in other areas such as trade liberalization).

The international bureaucracies are trying to convince poor nations, which already suffer from bad policy, that they can succeed by imposing additional bad fiscal policy and then magically hope that growth will materialize.

And having just spent last week observing two conferences on tax and development at the United Nations in New York City, I can assure you that this is what they really think.

Posted courtesy of your GST from the Launceston Public Library.

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18 Responses to Dan Mitchell on how to make nations rich

  1. rickw

    A rich nation is not on the agenda of Australian Politicians, since the Howard era it seems that they have been taking firm steps to curtail and destroy forever what was probably an accidental outbreak of prosperity.

  2. Bruce of Newcastle

    “When the people find that they can vote themselves money that will herald the end of the republic.” – Benjamin Franklin

    Prescient.

  3. True Aussie

    The problem with a rich nation is that, while the wealth belongs to the descendants of those who made it, too many parasites show up who believe themselves entitled to their cut of that wealth. These parasites inevitably come from a culture of low trust and social selfishness. National wealth is only possible though in a high trust society.

  4. Michael K

    Global Warming has unleashed a veritable epidemic of parasites.

  5. Ray

    Ideological drivel.

    Whilst high taxes and big government create distortions which discourage growth, it does not follow that small government and low taxes will result in growth. Most third world countries have limited taxing potential and hence limited government, yet they remain in poverty and fail to develop any of the infrastructure which we would identify with an advanced economy, such as universal schooling, distributes health services and good infrastructure.

    The reality is that societies remain in poverty because of the existence of poverty traps, which require a fundamental technological shift to overcome. For the Asian tiger economies this technological shift came out of the Green revolution inspired by Norman Borlaug, amongst others. For the UK, it was the development of the Dutch plough and structural changes such as the policy of enclosure. In neither case was growth triggered by a reduction in the size of government or in a fall in the tax burden.

    If anything, the period in which English per capita GDP began to take off (early to mid 1800s) was the very time in which the government introduced the first income tax (1790). Indeed, England was engaged in 137 wars between 1700 and 1850 and this required a significant increase in the size of government. Clearly, a growth in taxes and government did not prevent the industrial revolution, nor did they stifle economic development.

    The above is not intended to condone excessive government expenditure or distortionary taxes, only to question the implication that low taxes and small government are required for growth. They are not.

    Of course, international institutions such as the Word Bank often do more harm than good. They constitute enormous bureaucracies which exist for the sake of those bureaucracies themselves rather than to overcome poverty. As a result, they do little to understand or address the poverty traps which plague a good portion of the world’s population. Yet to criticize them without understanding the causes of underdevelopment is a mistake.

    Rather than an ideologically motivated attack on the size of government, it would be better to ask a much more important question. Why did the Green Revolution fail to overcome the poverty traps in Africa and India? Answer that and we could go a long way to improving the lives of many millions of people.

  6. EvilElvis

    So Ray, what is the answer to your questions then?

  7. Ray

    EvilElevis, if I had the answer to this question I would also have a Nobel prize. Unfortunately, looking at economic development from microeconomic foundations is a relatively new approach and so the answers are not there yet. However, the solution will lie in a combination of factors including health, education, finance and insurance infrastructure targeted at those individuals with a steady state growth potential. There are a myriad of interrelated issues which need to be addressed and these are complex and vary enormously based upon specific environments.

    For anyone who wants to read about this an easy introduction is Banerjee and Dufflo, Poor Economics : A Radical Rethinking of the Way to Fight Global Poverty.

  8. Nicholas (Unlicensed Joker) Gray

    STOP telling poor countries how to get rich!!!! Do you want Australia to lose all its’ advantages?

  9. will

    Most third world countries have limited taxing potential and hence limited government, yet they remain in poverty

    Whilst the second bit is true, you obviously haven’t visited many third world countries to experience the level of bureaucracy and government interference in daily life.

    On all the other historical stuff you are confusing cause and effect.

  10. Ray

    Will, ask your average maize farmer in Oyo how much interaction he has with the government. Roads are almost non existent and healthcare is rudimentary. at best.

    It is all well and good to visit a country and experience government intervention in the main cities as a tourist, however, your average subsistence farmer does not live in the cities.

  11. Rafe

    Ray you need to read Peter Bauer on the impact of government regulation of markets in the Third World.
    Your argument about tax in Britain is weird! You might as well suggest that the taxes caused the wars☺

  12. nfw

    Don’t you just print more “money”? That worked well for the illiterates running Zimbabwe. Didn’t seem to stop Mrs Mugabe from owning a million dollar (US) apartment in Hong Kong. Of course there is always the Venezuelan Solution; lots of luvvies put their names in Australia to a large newspaper ad congratulating those illiterates but I haven’t seen anything from them for a while. Must be finding the right leftie luvvie “progressive” excuses, er right-on slogans.

  13. Infidel Tiger

    If anything, the period in which English per capita GDP began to take off (early to mid 1800s) was the very time in which the government introduced the first income tax (1790).

    I wonder what else happened at that time? Was there some sort of revolution of industry that saw the largest leap in productivity in history taking place?

  14. Ray

    Infidel Tiger, thank you. That is my point exactly.

    Innovation drives economic growth. The size of government and the level of taxation can create distortions which limit the effectiveness of shocks resulting from technological change but government size and taxes do not determine whether growth will occur.

    Applied to the UK during the industrial revolution, innovation in production technology and techniques were the cause of growth and this occurred in spite of taxes and government spending. If you had read my comment you will realize that this is exactly what I was saying.

  15. Ray

    Rafe, I made no suggestion about the causes of the wars nor is this relevant to the discussion. The subject matter is whether small government is a necessary precondition for growth in developing countries.

    Now I am not suggesting for a moment that big government or a heavy tax burden is good. Indeed, I regard these as negatives to growth. However, it is clear that growth can occur in an environment of big government and large taxes, as my example of the UK during the industrial revolution demonstrates. The point being that growth is driven by innovation in technology and processes and government is generally a by-stander in all of this.

    As for reading Bauer, I have and there is not much that I would disagree with. Again I am not recommending a heavy handed regulatory environment for either developing or developed countries. I do not regard such approaches as positive for growth. Instead, my comments were directed solely at the suggestion implied in the original post and the attached video link that small government and low taxes are a prerequisite for growth. This just is not so.

  16. Nicholas (Unlicensed Joker) Gray

    Interestingly enough, I read somewhere that an increasing population in fact forces innovation, and thus creativity, because the alternative is death and/or stagnation. Japan has had a declining population for decades, and has never really been an innovation nation.
    Australia should keep them migrants coming, simply so we don’t become complacent, and then stagnate.

  17. Ray

    Endogenous growth theory assumes that the rate of technological change is based upon population growth. It is implicit in the theory that all societies can grow at the same rate with the same educational and training environment. However this has not been observed in empirical studies. Instead we can see conditional convergence suggesting that endogenous growth theory may not explain development.

    As for Japan, I would suggest they have demonstrated a significant degree of innovation. Sure they have adapted a considerable amount of imported technology but that is the nature of convergence, especially in the early days of the development cycle. More specifically, their skills at adapting and commercialising technology should not be discounted, nor should Japanese record in process improvement which they exported back to the West a couple of decades ago. Commercialisation and process changes are just as important for technical innovation as is inventing a new widget, if not more so.

  18. rickw

    Rafe, I made no suggestion about the causes of the wars nor is this relevant to the discussion. The subject matter is whether small government is a necessary precondition for growth in developing countries.

    Smashing the indigenous culture is the prerequisite for growth in “developing” countries, everything else is secondary. These places aren’t still “developing” by some accident of history and location.

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