Standard economics does not have an adequate conception of harm. Consequently it does not understand that the political-economic system can be organized for the benefit of a few, and that ordinary people can be harmed by the operation of this system. This blog post is based on Vested Interests and the Common People in Developing Countries: Understanding Oppressive Societies and Their Effects published in the June 2017 Journal of Economic Issues.
The standard economic model of how economies work is that activities are essentially productive. This is not a correct view of reality. The principal difficulty is that there is economic activity that is unproductive and harmful (from the point of view of those being harmed). This is a central feature of the economic organization of these societies, and creates poverty. Societies are run on this basic set of principles: Take and maintain control of the government and other aspects of society, and use the power of government to obtain income. Principal ways in which ordinary people are harmed include the following.
People at the top of government, or those who have significant control over the government but who are not government officials—often entrepreneurs or corporations—can and do obtain resources coming into the government. Government revenue is often not devoted to beneficial services but siphoned off by those in control of the government. Such activity is typically referred to as corruption. A nation expects that government resources will be used for the benefit of the nation. However, very large amounts of such revenue are often used to enrich those who control or have influence with the government. Taxes owed to the government are avoided, and the system of justice is biased toward the rich and/or powerful, enabling them to bend the law in their favor. People at lower levels of government can obtain income too, by not providing services which they are paid to provide, by charging for services which they should provide, or by taking goods, such as medical supplies or automobiles/trucks, which should be used for government service. Of 167 countries tracked by Transparency International, 114 countries score below 50 out of 100 in its 2015 Corruption Perceptions Index, which Transparency International says indicates serious levels of public sector corruption (TI 2016).
Misappropriation of natural resources and productive opportunities
Privileged groups, including international corporations, allies of high government officials, and government officials themselves can appropriate the benefits of national resources and productive opportunities.
Land. Land is continually being taken from the poor and powerless. The Land Matrix Initiative in a recent report (2016), lists 1,204 large scale deals with foreign investors which cover over 42.2 million hectares of land. (Intended deals target an additional 20 million hectares.) On more than 50 percent of the area, the area was already in cropland.
Oil and other resources. The allocation of natural resources such as oil and the resulting income frequently go to international corporations. Incorrect transfer pricing can hide profits. Natural resource corporations not publishing the amount given to governments as royalties and taxes allows governments to not adequately account for the money they receive. Other international aspects include tax havens, the possibility of international institutions which are undemocratic, frequently wrong and biased toward the needs and desires of the controlling countries. The Resource Governance Index, which measures the quality of governance in the oil, gas, and mining sectors of 58 countries, says that 80 percent of them fail to achieve good governance (National Resource Governance Institute 2016). Transparency International and Revenue Watch reported on 44 companies’ efforts to increase transparency and fight corruption. Results were mixed, with, for example, an increasing number of international oil and gas companies reporting on anti-corruption programs, while few national oil and gas companies did (TI 2011).
There is considerable impact on the common people by the struggle for control. We mention two: conflict and loss of human rights.
Conflict. There is a substantial amount of conflict in the world, most of it in developing countries. In 2015, there were 50 state-based armed conflicts; 70 non-state conflicts; and 118,000 deaths. The deaths were mainly state violence, with non-state violence (e.g., by drug cartels or between ethnic groups) and one-sided violence (violence by a state or organized group against civilians that results in at least 25 deaths) each responsible for about 10,000 deaths (Uppsala Conflict Data Program 2016). According to the U.N. High Commissioner for Refugees (2016), at the end of 2015, 65 million were forcibly displaced, with 41 million displaced within their own country, 21 million refugees displaced to another country, and 3 million asylum seekers. There were 12 million people newly displaced in 2015.
Restricted freedom. Of the 195 countries of the world, in 2015 Freedom House evaluated 50 countries as Not Free, 59 countries as Partly Free and 86 as Free (Freedom House 2016a). There are 10 political rights indicators and 15 civil liberties indicators such as touching key aspects of civil and political liberty.
The dead hand of the past
There is a very unequal distribution of income, which has persisted over centuries. Harmful economic systems have existed throughout history, and they have been a key cause of the unequal distribution of income. The distribution of productive assets is not just due to the operation of the productive economic system, as standard economics would have it. In the United States, for example, the Native Americans were almost totally pushed off their land, ending up with a few small, or if larger, hardscrabble, areas of land. Slavery oppressed African Americans from the beginning of European settlement in North America, and though ostensibly freed after the Civil War, severe oppression continued for 100 years or more. This in a country that many view as a model of democracy. In other areas of the world, control of countries and resources by a minority has also resulted in serious income inequality. The result is that poor people have substantially less income. This lower level of income is not, for many, just missing out on a few luxuries. It is a major cause of malnutrition, which causes greater infant mortality, stunting, and reduced cognitive ability. It is a major cause of poor health—many basic services such as clean water, waste disposal, and essential health services are not available at all. It is a major cause of poor education. And it is not only a matter of “providing” poor people with more human capital and other resources as economic analysis focusing on production would say; it is a question of correcting a system which is structured against poor people.
Barriers to entry
Barriers to entry also inhibit people’s incomes and life chances. It is not simply a matter of income as discussed above. Caste, race, ethnic group, and gender can restrict people’s access to jobs, education, having the rights of citizens, and from interaction with the “elite,” including marriage and other forms of social inclusion. People cannot rise or can rise only with difficulty—they are kept in their “station in life.” Though there has been a reaction against this sort of disparagement and oppression in many ways in many countries, it persists. The World Bank’s landmark report Equity and Development (2005) provides a good framework for and a detailed survey of inequality and its causes.
Two observations for discussion.
- The view expressed here broadens standard economics by introducing an explicit category of harm and by introducing a model of political control which is based on or leads to harm. These elements appear to some extent in the standard economic literature, but do not appear to have made nearly as much headway as I believe their importance would require. For example, Michael P. Todaro’s and Stephen C. Smith’s Economic Development text (2012) does mention some topics important in this paper’s approach such as corruption and conflict, but it does not rise to the level of a comprehensive analysis. For example, in the two chapters on economic growth, ninety pages in all, there are five pages covering the neo-colonial dependence model, the false paradigm model (development economists have given bad advice) and the dualistic development thesis, which are then dismissed as explanations.
- This paper presents an institutional perspective, one where the controlling institutions cause some harm to those not in control. This analysis is certainly similar to a Marxist view of development. Does such analysis require complete adoption of Marxist analysis, or can it be expressed as an expanded version of standard economics?
A central part of societies is the struggle for/establishment of political control. The relatively small group that wins is able to allocate a significant portion of the resources that it controls to itself. This has major impacts on economic development. This formulation of the struggle for political control leading to harm of the common people exists in standard economics, but has certainly not been clearly established as important. The common people must proceed against a political-economic system which is oppressive to a significant degree and, step by step, reduce that oppression. It is this process that must be understood in order to understand the political economy of Third World countries.
Freedom House. “Freedom in the World 2016.” 2016. https://freedomhouse.org/sites/default/files/FH_FITW_Report_2016.pdf. Accessed November 5, 2016.
Freedom House. Methodology. 2016 https://freedomhouse.org/report/freedom-world-2016/methodology. Accessed November 5, 2016.
Land Matrix Initiative. “International Land Deals for Agriculture.” 2016. http://landmatrix.org/media/filer_public/ab/c8/abc8b563-9d74-4a47-9548-cb59e4809b4e/land_matrix_2016_analytical_report_draft_ii.pdf. Accessed November 11, 2016.
National Resource Governance Institute. “Resource Governance Index 2016.” 2016. http://www.resourcegovernance.org/resource-governance-index. Accessed November 5, 2016.
Todaro, Michael P. and Stephen C. Smith. Economic Development 11th Edition Boston, MA: Addison-Wesley, 2012.
Transparency International. “Corruption Perceptions Index 2015.” 2016. http://www.transparency.org/cpi2015. Accessed November 5, 2016.
Transparency International and Revenue Watch. “Promoting Revenue Transparency: 2011 Report on Oil and Gas Companies.” 2011. http://www.transparency.org/whatwedo/publication/promoting_revenue_transparency_2011_report_on_oil_and_gas_companies. Accessed November 11, 2016.
United Nations High Commissioner for Refugees. “Global Trends: Forced Displacement in 2015.” UNHCR. https://s3.amazonaws.com/unhcrsharedmedia/2016/2016-06-20-global-trends/2016-06-14-Global-Trends-2015.pdf. Accessed November 11, 2016.
Uppsala Conflict Data Program. “2015 Number of Deaths.” Ucdp.uu.se. http://ucdp.uu.se/#/year/2015. Accessed November 5, 2016.
World Bank. World Development Report 2006: Equity and Development. Washington, DC: World Bank, 2005.