Naked Economics: Undressing the Dismal Science pdfdrive com

Effective government institutions. To grow and prosper, a country needs laws,
law enforcement, courts, basic infrastructure, a government capable of collecting
taxes—and a healthy respect among the citizenship for each of these things.
These kinds of institutions are the tracks on which capitalism runs. They must be
reasonably honest. Corruption is not merely an inconvenience, as it is sometimes
treated; it is a cancer that misallocates resources, stifles innovation, and

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discourages foreign investment. While American attitudes toward government
range from indifference to hostility, most other countries would love to have it
so good, as New York Times foreign affairs columnist Tom Friedman has pointed
out:
I took part in a seminar two weeks ago at Nanjing University in
China, and I can still hear a young Chinese graduate student pleading
for an answer to her question: “How do we get rid of all our
corruption?” Do you know what your average Chinese would give to
have a capital like Washington today, with its reasonably honest and
efficient bureaucracy? Do you know how unusual we are in the world
that we don’t have to pay off bureaucrats to get the simplest permit
issued?
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The relationship between government institutions and economic growth
prompted a clever and intriguing study. Economists Daron Acemoglu, Simon
Johnson, and James Robinson hypothesized that the economic success of
developing countries that were formerly colonized has been affected by the
quality of the institutions that their colonizers left behind.
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The European powers
adopted different colonization policies in different parts of the world, depending
on how hospitable the area was to settlement. In places where Europeans could
settle without serious hardship, such as the United States, the colonizers created
institutions that have had a positive and long-lasting effect on economic growth.
In places where Europeans could not easily settle because of a high mortality
rate from disease, such as the Congo, the colonizers simply focused on taking as
much wealth home as quickly as possible, creating what the authors refer to as
“extractive states.”
The study examined sixty-four ex-colonies and found that as much as three-
quarters of the difference in their current wealth can be explained by differences
in the quality of their government institutions. In turn, the quality of those
government institutions is explained, at least in part, by the original settlement
pattern. The legal origin of the colonizers—British, French, Belgian—had little
influence (though the British come out looking good because they tended to
colonize places more hospitable to settlement).
Basically, good governance matters. The World Bank rated 150 countries on
six broad measures of governance, such as accountability, regulatory burden,
rule of law, graft (corruption), etc. There was a clear and causal relationship
between better governance and better development outcomes, such as higher per

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capita incomes, lower infant mortality, and higher literacy.
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We don’t have to
love the Internal Revenue Service, but we ought to at least offer it some
grudging respect.