Third World Intervention
A New Analysis
David Smiley
[1998 / Published by the New South Wales Henry George
Foundation Ltd., 122 Little Eveleigh St. Redfern, NSW 2016, Australia.
PH/FX (2) 9319-2060. David Smiley, M. App. Sci., Research Associate,
Walsh Bequest, School of Economic and Financial Studies, Macquarie
University / Part 1 of 2]
ABSTRACT
The report reviews economic development strategies and their
relationships with humanitarian relief, environmental conservation,
and conflict resolution initiatives. The results of these strategies
are, in many cases, the reverse of those predicted by neoclassical
economics. This may be due to a reliance on neoclassical assumptions
about the behaviour of capital and labor in situations where
institutions possessing or seeking advantage in land and natural
resources can absorb resource inflows, block growth and maintain
inequality. Projections of present economic growth rates are compared
with projections arising from three alternative strategies for
institutional reform. The report concludes with recommendations for
international research and coordination at government levels, and for
new, complementary roles for organisations at non-governmental levels.
ENDORSEMENT
"I am happy to endorse the objectives of this report. I hope
the report may lead to a new evaluation of existing interventionist
strategies in the light of the complementary self-help strategy
which the report proposes. I hope also it will lead to a better
understanding of the common ground, and therefore mutual dependency,
between government and non-government agencies.
Dr. Keith Suter, President, United Nations Association (New South
Wales), visiting lecturer, Department of Social Work, University of
New South Wales, past lecturer in postgraduate Peace Studies, Sydney
University.
EXECUTIVE SUMMARY
REPORT OBJECTIVES:
To evaluate the potential for land value taxation (LVT) as a strategy
for reducing poverty, achieving high growth, and mitigating the pain
and cost of structural adjustment programs (SAPs). To assess LVT's
long term role in generating the income levels associated with fiscal,
political, population, and environmental stability. To suggest new
research and development roles for government organisations, and new
project implementation roles for non-government organisations.
MAIN PROBLEMS.
1. For the last half century third world development strategies have
been based on neoclassical labor-capital models. These predicted high
economic growth rates arising from capital inflows, the benefits of
which would trickle down to labor. In most regions the results are
quite the reverse of these expectations. For the last one or perhaps
two decades, in most regions of the third world, per capita income
growth rates have been negative. The greater the endowment in natural
resources the more negative has been this growth. It seems that the
labor-capital models have been quite inappropriate, particularly in
those economies where landed institutions can absorb resource inflows,
block growth and maintain inequality. Several kinds of surplus, which
economists call economic rents, are being consumed, not invested.
Where a country's institutions lack integrity and transparency, these
surpluses are nurtured for private consumption, in a process which
economists call 'Rent Seeking'.
2. SAPs, in addressing this behaviour, face many complex and elusive
examples of economic rent in a dense network of collusion and
corruption. In contrast, LVT faces one highly visible, tangible, and
immobile asset: land. Its economic rent, transferred from consumption
to investment by LVT, would double or triple existing levels of
saving. It would also remove much of the dead weight loss holding back
third world economies so far from their production possibility
frontiers.
3. Almost without exception, the only economies to achieve
consistently high growth with social equity are those which have
reformed rural land. China's remarkable growth (14.2 percent in 1992)
was driven by Town-Village-Enterprises not State-Owned-Enterprises.
Almost without exception, recent banking collapses worldwide have
followed excessive property loans, seeking untaxed capital gain in
urban land.
4. The West started to achieve fiscal, political and population
stability at about half its present per capita GNP. At present growth
rates the rest of the world will take about 600 years to reach this
level. Structural adjustment is slow and painful. But LVT, a
structural reform in its own right, complements SAPs while removing
their pain.
MAIN RESPONSES.
1. Aid programs tend to deliver a variety of benefits to landowners
while increasing rents payable by the landless.
2. Development programs tend to raise land values and therefore
rents, displace populations, and degrade the environment, and so
reverse the outcomes expected from apparently separate health, food,
and other humanitarian programs.
3. Environmental programs aim to achieve natural justice for all
following generations. But this has the effect of reducing both
incomes and equity within the present generation.
4. Structural adjustment programs aim to achieve economic reform, but
have the effect of reducing incomes temporarily, and increasing
inequality permanently, alienating much Western assistance.
5. Conflict resolution programs tend to maintain or rearrange
endowments in land and natural resources, without addressing the
sources of conflict in the economic and social consequences of these
endowments.
6. These responses may simply add to rather than subtract from the
number of migrants already displaced by the economic, environmental
and political problems which these programs address. Furthermore, for
whatever reason migrants are displaced, they forfeit the natural
opportunities in the land they leave behind. Then, at their final
destinations, they add to the land rent collectable by those who were
there first. Meanwhile, their struggle to survive in overcrowded camps
and slums subtracts from everyone's natural opportunities in
environmental quality.
RECOMMENDATIONS:
1.First, that budget allocations be adjusted, pro tem, away from
large-scale interventionist projects, the outcomes of which are
evidently far from understood. Budgets should be correspondingly
increased for research at home on the unintended consequences of
strategies which do not explicitly and quantitatively model the
effects of rent seeking, most particularly in land and natural
resources.
2. Next, that self-help strategies based on LVT be designed t6
complement conventional aid and structural adjustment strategies.
3. Next, that systems of incentives for the acceptance and
implementation of these self-help measures be developed, for example
through aid and loan conditionality.
4. Next, that international and local NGOs, given their continuing
local presence, share more UN project responsibility, especially in
those projects concerned with the reform of the most local of all
factors: land.
CONTENTS
- INTRODUCTION AND SUMMARY
Main problems
Main collective responses
Intervention - neoclassical or geoclassical?
Strategic implications
- CHAPTER I. INTERVENTION -A NEOCLASSICAL
CRITIQUE
Migration.
International government aid.
Non-government organisations.
Foreign private investment.
Domestic welfare programs.
Land reform.
Debt management.
Structural adjustment.
Conservation.
Conflict resolution.
- CHAPTER 2. A GEOCLASSICAL SYNTHESIS
Institutional failure.
Rent seeking.
Land redistribution and the Tigers.
Tax reform.
Intervention? or self-help?
A geoclassical growth model.
- CHAPTER 3. SOME STRATEGIC IMPLICATIONS
Some implications of the test
results.
Common interests.
- SUMMARY CONCLUSIONS AND RECOMMENDATIONS
Western intervention.
Explanations.
Effective institutional reform.
Models of reform.
Conclusions.
Recommendations for aid and development organisations.
- REFERENCES
- APPENDICES
A. Economic growth theory
B. Conflict resolution
C. Modes of rent seeking
D. Property theories
E. A Geoclassical model
F. Review of assumptions
6. The debt management model
H. The sustainability model
I. The conflict resolution model
* References and Appendices are not available
with the on-line version of this analysis. Readers should contact the
author for this detail.
INTRODUCTION AND SUMMARY
BACKGROUND
In the second half of the twentieth century, the West embarked on a
series of collective, interventionist strategies targeting perceived
third world problems. The strategy targeting poverty became known as
Development Economics. The strategy targeting armed conflict became
known as Peacekeeping or, more generally, as Conflict Resolution. And
the strategy targeting the depletion and degradation of natural
resources, not only in the third world, became known as Environmental
Economics.
These collective strategies have not been entirely successful. For
example, excluding the land reform Tigers such as China, the growth in
third world incomes, that is to say gross national product (GNP) per
capita, has not risen strongly as predicted by Development Economics.
Quite the reverse. This growth has fallen and has been consistently
below zero for 15 years. Conflict Resolution strategies have been
unable to contain the size and frequency of armed conflicts, conflicts
which seem to arise out of poverty and disputes over land rights. And
Environmental Economics has been urging conservation programs upon a
third world where the affordability of these programs is decreasing
rather than increasing, and where private and social property rights
in natural resources remain confused.
The purpose of this report, then, is to review a range of third world
problems, and the uses made of Development Economics, Conflict
Resolution, and Environmental Economics in addressing these problems.
It will be argued that these three strategies are, to some extent, in
conflict with each other, and each contains serious internal
contradictions. Central to these conflicts and contradictions is the
question of property rights in land and natural resources. A reformist
strategy based on the taxation of land and natural resources will be
presented. It will be argued that criticisms of this tax strategy,
whether valid or not for the West, are irrelevant in the third world.
Quite the contrary. The strategy presented is seen as perhaps the only
way of offsetting the negative impacts upon social equity of the IMF's
structural adjustment programs. Finally, the reform could lead, faster
than any other, to a standard of living associated with political,
population and environmental stability.
Since the structural reform proposed here is relevant to all types ~f
projects and within all levels of intervention, the report is being
distributed to a wide range of third world development organisations,
both government and non-government. Given this wide range, the report
is structured into three levels. In this section the main problems,
responses, and reform proposals are summarised at a non-specialist
level. Chapters one, two and three then provide supporting economic
analyses. At a third level are found a number of technical appendices.
Since the use of a number of economic concepts is unavoidable, even in
this non-specialist introduction, it may be helpful to provide here
preliminary definitions of some terms which occur frequently. Further
clarification of these, and definitions of other terms, will occur in
context.
Institutions in this report are organisations which divert economic
outcomes from those which markets would achieve. In this context,
beneficial institutions are those which correct for market failure.
Harmful institutions (with which this report, and most institutional
analysts such as Olson, are largely concerned) are individuals,
private agencies, or government departments which exploit
opportunities arising from either market or government failure. This
exploitation may be passive, arising from established monopoly or
excessively large initial endowments, or active, as in bribery and
more direct forms of coercion to obtain economic advantage.
Economic Rent here is simply any unearned surplus obtained by rent
seeking activity or by initial endowment. The term is more formally
defined in monopoly theory.
Land Rent is the factor return to land and natural resources. Western
economists, increasingly viewing natural resources rent as a form of
economic rent, are apparently r[ot yet agreed as to the conditions
under which surface land rent is distinct from economic rent. In the
third world, it will be argued in this report, there is little
distinction.
Rent Seeking is a self-seeking activity generating social waste
rather than social surplus. Rent seeking theory has, over the past 25
years, provided economists with a powerful tool for analysing the
reasons for poor economic performance.
Abbreviations. The following abbreviations will be used occasionally
in the report: CBA (Cost Benefit Analysis), GNP (Gross national
Product), IMF (International Monetary Fund), LDC (less developed
country), LVT (Land value taxation), NGO (Non-Government
Organisation), NPV (Net Present Value), OECD (Organisation for
Economic Cooperation and Development), SAP (Structural Adjustment
Program), T'FP (Total Factor Productivity), UN (United Nations).
MAIN PROBLEMS
What, then, are the main third world problems? These are seen here as
poverty and inequality, economic stagnation, environmental
degradation, armed conflict and political collapse, and large-scale
human dislocation and migration.
Poverty and inequality. Poverty is difficult to measure. It is a
slippery concept, and research indicating the futility of attempts to
define it has been reported recently (Economist, 1998b:88). Because of
this, inequality of income is used as a measure of equity in this
report. For example, inequality between nations can be measured by
reference to World Bank Development Report tables. These indicate
large and growing income inequality between rich and poor nations, for
example:
| 1980 |
1995 |
Income
(per capita GNP) for the West was found to be: |
| 16 |
23 |
times greater than that of the rest of the world |
| 40 |
58 |
times greater than that of low income economies |
| 454 |
86 |
times greater than that of low income economies,
excl. India and China |
Table 1. Income comparisons.
Inequality of income within countries can be measured by decile
tabulations and Gini coefficients. Research cited by Todaro (1997:150)
indicates growing inequality within low-income countries, countries
where land is the principal form of wealth and the main source cf
economic and political power. But undeclared incomes and imputed land
rents must mean that inequality is greatly understated. The
accumulation of landed wealth, and the difficulty of measuring it, are
well illustrated in the following extract (Lappe and Collins, "Food
First", 1977):
"The buyers are a motley group, some connected with land through
family ties, some altogether new to agriculture. A few have unemployed
rupees acquired through undeclared earnings, and most of them look
upon farming as a tax haven, which it is, and as a source of earning
tax-free supplementary income. The medical doctor from Jullundar who
turned part time farmer is sitting pretty. The 15 acres he purchased
four years ago have tripled in value. To listen to him, he is farming
'for the good of the country' ... His only vexation is whether or not
he will succeed in buying another 10 acres he has his eyes on - and
what a disappointed man he will be if they escape him. As we watched
him supervise the threshing, he was anything but a gentleman farmer."
Economic stagnation. Some of the problems facing the development of
the third world are illustrated by the following data on income growth
derived from World Bank Development Report tables. World Bank data are
used throughout this report, using labels shown in parentheses in
table 2. The 'West' is taken here to be equivalent to the OECD
economies, The ex-socialist 'Transition' economies closely map the
World Bank's 'Middle Income, Europe and central Asia', and 'LDCs' are
Less Developed Countries. The term 'Third World', depending on
context, is usually synonymous here 'with LDCs, but excluding those
defined below as Tigers.
| Growth. Average income
growths were found to be |
1960-1980 |
1985-1995 |
| High income economies (West) |
+3.6 |
+1.9 |
| Middle income economies |
+3.8 |
-0.7 |
| Middle income, Europe &C. Asia (Transition) |
+4.2 |
-3.5 |
| Low & middle income economies (LDCs) |
- |
+0.4 |
| Low income, excluding India and China |
+1.0 |
-1.4 |
| High income, excluding Indian and China |
+6.3 |
-2.0 |
| India |
+1.4 |
+3.2 |
| China |
+3.4 |
+8.3 |
Table 2. Declining rates of economic growth.
India has been selected as a large country which has experienced
structural adjustment. China has been selected as a large country
which has experienced land reform, as have Taiwan, South Korea, and
Chile, labelled 'Tigers' in this report.
Environmental degradation. High up in the list of contributing
factors here are population growth, economic growth, and property
rights (See for example Todaro, Tietenberg, World Bank 1992).
Population growth, perceived as an environmental threat, is not
expected to peak, at 10.6 billion, until 2080 (Earthscan, 1996).
Economic growth, though also perceived as an environmental threat, is
nevertheless strongly correlated with falling birth rates, and can
provide the technology for cleaner resource conversion, and for scarce
resource substitution. Furthermore, research (World Bank, 1992:40)
suggests that pollution levels rise initially, and then fall, as GDP
increases.
So, economic growth should eventually deliver the levels of income at
which sustainable development becomes affordable. But, until this
point is reached, the planet sustains cumulative, possibly
irreversible, damage. Given high birth rates and assuming positive but
low economic growth rates, this point could be a very long way off for
the LDCs. If conventional strategies of economic growth have failed
then other ways of quickly raising economic growth need to be found.
Political collapse. Armed conflict and subsequent political
collapse is now almost exclusively a third world problem. For example,
between 1949 and 1989, more than 99.4 percent of the deaths due to
conflict have occurred there (World Bank, 1991:128-142). Conflict is
now more important than any other disaster with which humanitarian
agencies have to deal.
Is it possible to identify the causes of conflict in such a way as to
lead to effective containment strategies? The Red Cross (1996:138) has
defined and tabulated, for 1990 through 1995 and for different regions
of the world, two main causes. One, coded G for government, concerns
the type of political system and a change in central government or its
composition. The other, coded T for territory, concerns control of
territory, through interstate conflict or internal secession. For
Middle East, Asia, and Africa the frequencies of conflicts coded as G
or T were roughly the same. For Europe the causes were exclusively
territorial, for the Americas exclusively governmental.
The last is surprising. For example it might be argued, since
problems of landlessness have always characterised Latin America, that
nearly all armed conflict there (and perhaps elsewhere) ultimately
concerns ownership of land and natural resources for which political
systems may be a surrogate. And it might be argued, in view of the
number of conflicts involving Islam, that there should be a category R
for religion. But Islam fuses religion and government into one unique
polity. The Red Cross would therefore probably code these conflicts as
G. But perceived territorial wrongs, and disputes over oil, gas and
coal appear to underlie much Islamic militancy, which would suggest a
code of T. Militancy may also be an outcome of poverty, for whatever
reason, and ideologically channelled resentment at this poverty, for
example in Iraq.
The casualties from armed conflicts are reported daily in the media.
Surprisingly, there has been little analysis of the land value flows
both causing and caused by these conflicts. These land values have
their genesis in positional advantages on the globe's surface, and
resource advantages either side of this surface. It may be that long
term strategies for conflict resolution, in following emerging trends
in environmental strategies, need to make a distinction between
private and social rights to the natural opportunities being
contested. The collective political maturity which this implies is a
very long way off, though a major political catastrophe could hasten
its arrival. More pragmatic solutions are seen in sublimating the
hostility of the disadvantaged and dispossessed. This may be achieved
by encouraging efficient and equitable economic growth in regions of
political instability, a main theme of this report.
Human displacement. According to Todaro (1989:263): "One of tie
most perplexing dilemmas of the development process is the phenomenon
of massive and historically unprecedented movements of people from the
rural countryside to the burgeoning cities of Africa, Asia and Latin
America". Population displacement and migration are byproducts of
all of the main problems already summarised, and of natural disasters
which are not considered here. The number of third world refugees, for
example, has increased from about eight million in 1985 to nearly 20
million in 1995 (World Bank, 1997, Fig. 8.2). The construction of
large dams alone uproots four million people each year.
But there are many others beyond the reach of statistics: "We
think two million sleep on the streets. Birth and death rates are
unknown but certainly high" (Calcutta street clinic doctor
interviewed by the author). To these homeless must be added dwellers
in hutments built of recycled materials: "If these hutments grow
at the same speed, very soon more than 60 to 65 percent of the
population will be slums..." (Mahratta Chamber of Commerce,
Pune). A quarter of China's population is expected to migrate into its
cities by the year 2010. Global estimates of displacement vary widely,
up to 100 million persons now and up to one billion by 2050 (Red
Cross, 1996:13). These figures seem roughly in line with recent UN
projections of urban populations rising from 2.4 billion to 5 billion
by the year 2025 (UN 1995).
But, whereas examples of all this displacement are reported daily,
the transfers of real or imputed land rent from the have-nots to the
haves seem not to enter the accounting systems of development
economics in ways which might suggest solutions. Public collection of
these otherwise privately appropriated transfers, in reducing the cost
of urban land and supplementing revenues for welfare, would
immediately soften the impacts of migration. More importantly, in
reducing rural inequality, this would reduce incentives to migrate and
encourage stable growth in regions of transition or political
instability. Meanwhile, for whatever reason migrants are displaced,
they forfeit the natural opportunities they leave behind. Finally,
they then add, at their destinations, to the land rent collectable by
those who were there first. Meanwhile, their struggle to survive in
overcrowded slums subtracts from everyone's natural opportunities in
environmental quality.
Summary of the main problems. Poverty, inequality and economic
stagnation are the concern of Development Economics. Political
collapse of states is the concern of Conflict Resolution. And
environmental degradation and sustainable development are the concerns
of Environmental Economics, But these problems are not independent,
they impact one another. One illustration of the results of this lies
in the large-scale human dislocation we call migration. What have been
the effects of collective responses to these third world problems?
MAIN RESPONSES
First, what are the main collective responses? These are seen here as
government aid, non-government aid, foreign private investment,
welfare programs, land reform, debt management, structural adjustment,
conservation, and conflict resolution.
Government aid. Governments individually, and collectively
through international and regional organisations, have provided
massive capital and other resource inflows into the third world,
particularly in the last half century. Within this report we will be
assessing four criticisms of this aid: that it has flowed into
consumption rather than into productive investment for growth (Boone,
1994), that the failure of this aid is almost entirely due to
institutions rather than to lack of physical or human capital (Olson,
1996), that this aid may sometimes achieve efficiency outcomes but at
the expense of equity outcomes (Oxfam and other critiques of IMF
conditionality), and that both the direction and content of aid
depends too often on political agendas (Todaro, Oxfam, and many
others). But, for whatever reasons aid goes adrift, it has created
massive foreign debt. Apparently unrecoverable, this debt hovers
around 30 percent of third world GNP (Todaro, 1997:509).
Non government aid. In Western countries there are the
headquarters of a large number of voluntary, charitable non-government
organisations (NGOs). In third world countries there are many field
workers and representatives of these NGOs, often working in
conjunction with local NGOs. All these people deliver and maintain a
very large range of services, typically in agriculture, health and
education. With first hand knowledge and experience of the structures
which obstruct their efforts they must nevertheless leave initiatives
for the reform of these structures to others. Within this report we
will assess proposals for NGOs to accept a wider role in the
implementation of reform programs, particularly in conjunction with
international and national donor governments, and with recipient
regional, national and local organisations.
Foreign private investment. We distinguish here three types of
capital flow. There are short term speculative flows, for example
those seemingly associated with recent economic disasters. It is quite
beyond the scope of this report to consider suggested reforms such as
global frameworks of fiscal discipline, and international insurance
instruments for loan guarantee. However, it will be argued in this
report that, since a high percentage of loan defaults has apparently
been caused by property speculation, the reform of irresponsible
banking systems could be greatly hastened by taxation reforms which
remove incentives for this type of speculation.
A second type of capital flow has many examples in China, and in the
other Tigers which have addressed their land problem. Here, long term
productive investments are negotiated competitively, that is to say
between many consumers and many potential suppliers of capital.
A third type of capital flow also concerns long term productive
investments. But, in these cases a foreign monopolistic agent, such as
a transnational corporation, negotiates land and resource rights with
a local monopolistic agent. Although this type of investment has
received much political attention under the headings of 'Dualism' and
'Enclave Economies', there has been little analysis of the land value
flows involved. The economic and equity outcomes of this type of
collusion are analysed in this report.
Welfare. It seems that much economic aid and some forms of
foreign private investment can have unintended consequences,
especially for social equity. Can social welfare objectives be met
through local taxation? Because of the high levels of institutional
and private corruption, conventional taxation outcomes are much less
efficient and less equitable than those in the West. The largest
sources of revenue, indirect taxes, are distortionary and regressive,
and typically account for 85 percent of total tax collection. Income
and profit taxes are usually honeycombed with exemptions, when they
are not evaded altogether. Property taxes, including land taxes,
typically contribute less than two percent of revenue. A comparative
analysis of taxation strategies is found in chapter 2. We need one
which can support a substantial local welfare program.
Land reform. Though frequently advocated in the literature,
the only type of major land reform which has been successfully
implemented in agrarian societies is land redistribution. Land value
taxation, considerably superior to land redistribution, has been
implemented mostly in the urban West, but partially and at very low
tax rates. Other methods have met with failure. For example, private
consolidation of land into large holdings may or may not be efficient,
but leads to great social inequality. Public consolidation,
collectivization, has achieved equity in the past, but at the expense
of considerable inefficiency. Tenancy reform has generally been easily
circumvented, as have ceilings and floors on rent, farm sizes, and
wages. Agricultural reforms, such as the "Green Revolution",
are often included under the heading of land reform. In this report
the Green Revolution is treated separately as one of the outcomes of
development investment which "mostly served the needs and vested
interests of the wealthy landowners" (Todaro, 1997:326).
Debt management. Reactive debt management strategies include
default or repudiation on the part of the debtor, and loan
rescheduling or forgiveness on the part of the creditor. Proactive
debt management strategies include the use of land value taxation
revenue to move, inter alia, towards solvency. All these options are
analysed later in this report.
Structural adjustment. The Marshall plan, while pumping
capital into post-war European development, left the task of
structural reform in the hands of local institutions, which were well
understood. When it was found that similar capital injections into
third world development led to debt rather than growth, the task of
structural reform was picked up, by default, by the World Bank and the
IMF. The prevailing reform strategy is structural adjustment and, like
capital injection, its neoclassical economic logic is impeccable.
However, the outcomes of structural adjustment programs, in terms of
efficiency, have been mixed and, in terms of equity, have generally
been disastrous. Local institutions were not, and still are not, well
understood.
Unsurprisingly, structural adjustment programs have been heavily
criticised, by local institutions for reasons connected with the
preservation of rent seeking opportunities, and by NGOs and social
commentators for equity reasons. Though these equity criticisms are
convincing, the proposals offered are unlikely to be effective since
they still sit within a prevailing two-factor capital-labor structure,
whether neoclassical or socialist. Accordingly, this report advocates
a complementary reform which would not only offset these equity
effects of structural adjustment programs but represents a major
structural adjustment program in its own right.
Conservation. Typical political responses to environmental
problems have included exhortation at the international level, and
attempts at regulation at the national level. Economic responses,
often referred to as green taxes, are moving towards the concept of
social ownership of the rent of natural opportunities. But although
green taxes encourage the economic rationing and technological
substitution necessary to conservation, they restrict the economic
growth necessary to achieve incomes at which conservation might become
affordable. Affordability for the third world, given contemporary
economic growth rates, is elusive, to put it mildly. What is needed
are reforms to stimulate growth.
Conflict resolution. There have been three main international
responses to territorial conflict. First, by appeal to rules derived
from the UN Universal Declaration of Human Rights. Second, by largely
unsuccessful mobilizations intruding into dynastic struggles over
monopolies of territories and natural resources. And third, by a
backup for the failure of both in the form of trade sanctions which
seem more likely to delay rather than advance the evolution of the
politically stable state. These responses remain short term
necessities. But, if conflict is a response to poverty, then strong
and equitable economic growth may be the only appropriate response to
conflict.
Summary of the main responses. These responses to third world
problems have been frequently and heavily, but seldom very
constructively, criticised. As a lead-in to subsequent analysis of
these responses, and to anticipate its recommendations, some less
obvious side-effects of these responses are summarised here.
1. Aid programs tend to deliver a variety of benefits to landowners
while increasing rents payable by the landless.
2. Development programs tend to raise land values and therefore
rents, displace populations, and degrade the environment, and so
reverse the outcomes expected from apparently separate health, food,
and other humanitarian programs.
3. Environmental programs aim to achieve natural justice for all
following generations. But this has the effect of reducing both
incomes and equity within the present generation.
4. Structural adjustment programs aim to achieve economic reform, but
have the effect of reducing incomes temporarily, and increasing
inequality permanently, alienating much Western assistance.
5. Conflict resolution programs tend to maintain or rearrange
endowments in land and natural resources, without addressing the
sources of conflict in the economic and social consequences of these
endowments.
6. All these responses simply add to rather than subtract from the
number of migrants already displaced by the economic, environmental
and political problems which these programs address. Furthermore, for
whatever reason migrants are displaced, they forfeit the natural
opportunities in the land they leave behind. Then, at their final
destinations, they add to the land rent collectable by those who were
there first. Meanwhile, their struggle to survive in overcrowded camps
and slums subtracts from everyone's natural opportunities in
environmental quality.
The aggregate result of these adverse side effects is widespread and
rising resentment, easily focussed on all forms of intervention. This
resentment may lead to the rejection of upstream initiatives such as
structural adjustment programs, and curtailment of downstream
initiatives such as welfare. These downstream initiatives are then
further curtailed by donor disillusionment and recipient shortfalls in
government budgets. This resentment may lead, for a variety of covert
reasons, to the breakdown of peacekeeping. And this resentment,
heightened by perceptions of inequality, must act as a brake on
international efforts to contain the degradation and depletion of the
natural environment.
INTERVENTION - NEOCLASSICAL OR GEOCLASSICAL?
Western intervention in the third world seems to have relied on
neoclassical, labor-capital economic models. These models are
inappropriate to economies where landed institutions can absorb
resource inflows, block growth and maintain inequality. It is argued
in this report that the harmful effects of this institutional
behaviour could to a large extent be corrected by taxation reform. The
reform proposed would shift the neoclassical emphasis on the taxation
of consumption, capital and labor in the direction of what might be
called a geoclassical emphasis on the taxation of natural
opportunities in land and natural resources.
Institutional failure. Olson (1996) implies that it is third
world institutions which are entirely responsible for the massive
squandering of all kinds of resources. And the World Bank, in
analysing what it calls the pathology of state collapse, concludes
that states which have been run into the ground by corrupt, negligent
or incompetent leaders and officials, or which have been fragmented in
civil war, in all cases have suffered institutional failure (World
Bank, 1997:158). How can institutional failure be prevented, or
damaged institutions repaired? Since Development Economics has not
been able to predict or effectively deal with economic collapse, and
since the theories and strategies of Conflict Resolution have
similarly been unable to predict or effectively deal with political
collapse, the question is extraordinarily important. So, how can the
behaviour of Olson's institutions be explained, perhaps in a way which
might lead to alternative reform strategies?
Rent seeking. Variously known as DUP (Directly Unproductive
Profit-Seeking Activities), or activities generating social waste
rather than social surplus, rent seeking ref(~s to all activity aimed
at capturing an unearned surplus which economists call economic rent.
The diversion of this unearned surplus can occur through persuasion,
bribery, corruption, armed coercion, or quite simply through what
economists call initial endowments". Conventional reform,
targeting the unearned surpluses flowing through Olson's dense
networks of collusion and corruption, is a slow and painful business,
as the World Bank and IMF well know. But land can be described by
three simple attributes: site, title, and rental value. In situations
where initial endowments in land are caused by or encourage
monopolistic structures, land rent becomes what economists call
economic rent, and a legitimate target of taxation. Rent seeking
theory then provides a measurement of the equity benefits in transfer
payments and efficiency benefits in the removal of dead weight loss
(See chapter two and appendix C).
Land redistribution. The Asian Tiger reforms effectively
removed a very large component of monopolised economic rent, simply by
redistributing agrarian land. Though this reform falls far short of
that based on the taxation of land values, its results suggest that
structural adjustment, should precede, not follow, capital injection.
Land value taxation. This strategy is elaborated in chapter
two. Its objectives are summarised here as the improvement of
production efficiency and distributive justice. It is implemented by
identifying each parcel of land, calculating the rent of the land
component excluding structures, and collecting this rent, at an
appropriate rate, by a land tax.
A geoclassical model. For Development Economics and Conflict
Resolution, though not for Environmental Economics or for local
government financing, land value taxation may appear to be an entirely
new politico-economic product, therefore requiring feasibility study
and testing. And this is what we are asking recipients of this report
to do. For exploratory purposes we have constructed simple growth
models of four stereotypical economies representing no reform,
structural reform, agrarian land redistribution, and land value
taxation. Each economy was set three tasks, to repay foreign debt of
30 percent of GNP, to reach incomes which might be associated with
political stability, and to reach incomes at which sustainable
development might become affordable. The differences in the times to
reach these targets, and in the costs incurred along the way, are
astonishing Accordingly, some comments on Cost Benefit Analysis are
included in appendix E, and all assumptions used are critically
examined in appendix F. The three test runs are reported in appendices
G, H, and I.
STRATEGIC IMPLICATIONS.
From the arguments presented, this report will suggest that the third
world aid industry needs to:
Seek a much greater understanding of the unintended
consequences of each other's activities, across projects and between
levels of the entire aid industry.
Consider fine tuning or redesigning short term strategies in
order to reduce the effects of these adverse interactions.
Recognise that long term goals such as stable populations,
politically stable states, and environmentally sustainable
development, are unattainable without strong and especially equitable
growth. We need a new collective strategy for achieving this without
the short term economic, and long term social costs of contemporary
strategies.
These, then, are the reasons for addressing so wide a readership.
This introduction and summary section has been aimed at the
non-technical reader. The remainder of the report takes the form of
economic analysis or extended discussion of the problems, collective
responses, and reform proposals referred to. Reference material is
drawn from readily available World Bank reports, well-known specialist
texts, and research summaries published in The Economist.
Part
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