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Economic Laws for the Real World

June 9, 2007

Why are Third-World countries poor, while those in the First World aren’t? (The phrase “third world” is a tad shaky, embracing as it seems to Taiwan, Thailand, and Mexico, and also Haiti and Zaire. We will use it for convenience.)

The standard explanation in the Third World is that the West, chiefly the United States, exploits them, buying their raw materials and selling them manufactured goods. Everything is someone else’s fault. The reasons I think are otherwise. The advanced nations will exploit anyone they can, but this hasn’t kept Japan, Singapore, Taiwan, Argentina, and many other countries from prospering.

Start with corruption. In many poor countries, virtually everything is for sale. You can bribe the cops to get out of a ticket or bribe them to beat up an enemy, bribe a general in the army to overlook illegal logging, bribe anybody to do anything. The result is that really the country barely has laws, which means that you can never be sure of your legal ground. Businesses need predictability.

Corruption exists in advanced countries, but there is less of it, and it tends to take organized form, as in campaign contributions, affirmative action, and seats of boards of directors after leaving office.

Suspected Economic Law: The easier it is to bribe a working-stiff cop, the poorer the country.

Sheer governmental inefficiency has much to do with it. When I was in Taiwan many years ago, when the country was first developing, I talked to an American businessman about Asia. Taiwan, he said, had Enterprise Zones, fenced regions with buildings and utilities in place. You signed one document, brought in your machinery, hired workers, and started production.

In Thailand, he said (it may no longer be true) you had to negotiate for months with the Interior Ministry to get land, then months with the Labor Ministry, then months, then months, meanwhile bribing everybody right and left. I’ve got the names of the ministries wrong, but you get the point.

Suspected Economic Law: Prosperity varies inversely with the time between beginning negotiations to open a factory and getting first product.

While inefficient government retards economic progress, it doesn’t follow that countries with inefficient governments will always be poor. Industry in the United States has been so productive that, although the government is worse than useless, the country can withstand it.

A serious obstacle to prosperity is Shanti-ness, a quality not widely recognized in econometrics but well known to experienced travelers. Shanti-ness is a curious mixture of just not giving a damn, lack of ambition, little interest in academics, and sometimes something that looks like lethargy.

You go into houses and never see books. A man will start a garage to repair cars for a living. He won’t think of expanding and owning a chain of garages. His family has enough to eat, so why do more? The young, though they could pursue school beyond some pre-high school level, don’t. They marry early instead of establishing themselves first. People can’t drive well. They live in the present, whereas people in rich countries have one foot in the future. An American thinks college, grad school, career. He is going somewhere, or trying to. He may not adhere to his plan, but he has one.

An element of Shanti-ness is a slack attitude toward maintenance. People who could easily afford nineteen cents for a brake-light bulb don’t. They throw trash in the streets. Potholes go unprepared for years.

Suspected Economic Law: National income is inversely proportional to the amount of trash in the streets.

Another aspect of Shanti-ness is an incapacity to attach importance to time. This comes in two flavors, wholesale and retail. At the wholesale level, an American thinks, “Oh my god, I’m thirty and haven’t made partner.” A Third-Worlder lacks any sense of urgency. He sees existence as a period through which one passes instead of an interval in which one does things.

At time’s retail level, Third-Worlder’s think that four o’clock means anywhere from five-thirty to not at all. It isn’t rudeness or inconsideration. If you do it to them, they won’t be offended. By contrast, an American reporter, say, knows that if his nine-o’clock interview happens at nine, the one at eleven will be possible, and the business lunch will come off on time, so that he can hit the computer by three and file at five. It works. Americans show up ten minutes early and wait. In the Third World, writing the same story would take three days instead of one.

Suspected Economic law: Per capita income correlates with the average number of minutes by which people miss appointments.

In the Third World there is a different attitude to commerce. An American businessman is likely to give a new client a good price, or at least the going price, in hopes of acquiring him as a regular customer. If in the Third World a European gets a haircut without asking the price, he will be charged eight dollars when the correct price is four dollars. He will never come back.

This is normal third-world economics—gouge the customer to the max without thought of the future. The practice is encouraged by the reliance on haggling in poor countries. I have sometimes wondered whether this doesn’t make tricking the customer more important than having a good product.

Suspected Economic Law: Countries that bargain have less money than those that don’t.

The what-me-care attitude can be, to an American, incomprehensible. You want a roof job that would cost several thousand dollars, a lot of money in many countries. The workmen promise to come the next day to give you an estimate. They don’t show. You call, and they say, well, my car broke. Next day, same thing. They got to your town but couldn’t find the house. And so on. So you go to Wal-Mart or Home Depot or some similar First-World enterprise and get the job done.

Another element of Shanti-ness is, depending on your politics, cultural or inherent, but unmistakable. Some populations just aren’t very bright, or at any rate don’t seem to be. Sub-Saharan Africa, though rich in resources, is pea-turkey poor and not improving. Arab countries, even when awash in oil money, do not establish First World societies that could survive without oil. In South America, the white countries, such as Chile and Argentina, could be in Europe. The highly Indian countries, as for example Bolivia and Peru, would be basket cases if they could afford the basket.

Suspected Economic Law: The more European or East Asian blood, the more money.

That’s Fred on economics. Lynch mobs may take a number.

From Fred Reed, here.

Among the U.S. Food and Drug Administration’s responsibilities are approval and regulation of pharmaceutical drugs. In short, its responsibility is to ensure the safety and effectiveness of drugs. In the performance of this task, FDA officials can make two types of errors — statistically known as the type I error and type II error. With respect to the FDA, a type I error is the rejection or delayed approval of a drug that is safe and effective — erring on the side of over-caution — and a type II error is the approval of a drug that has unanticipated dangerous side effects, or erring on the side of under-caution.

Let’s examine the incentives of FDA officials. If FDA officials err on the side of under-caution and approve a drug that has unanticipated dangerous side effects, the victims of their mistake will be highly visible. There may be congressional hearings, embarrassment to the agency and officials fired.

It’s an entirely different story if FDA officials err on the side of over-caution and either disapprove or delay the approval of a drug that is both safe and effective. In that case, the victims will be invisible. They will have no idea that their suffering could have been eliminated, or in the case of death, their loved ones will have no idea why they died. Their suffering and/or death will be chalked up to the state of medicine rather than the status of an FDA drug application. Their doctor will simply tell them there’s nothing more that can be done to help them. The FDA officials go scot-free.

Let’s look at some of the history of the FDA’s erring on the side of over-caution. Beta blockers reduce the risk of secondary heart attacks and were widely used in Europe during the mid-1970s. The FDA imposed a moratorium on approvals of beta blockers in the U.S. because of their carcinogenicity in animals. Finally, in 1981, the FDA approved the first such drug, boasting that it might save up to 17,000 lives per year. That means that as many as 100,000 people died from secondary heart attacks waiting for FDA approval. (http://tinyurl.com/ydxpvd54). Those people are in the “invisible graveyard,” a term to describe people who would have lived but died because the cure that could have saved them was bottled up in the FDA’s regulatory process.

Today, the Phoenix-based Goldwater Institute is leading the battle to bring some sanity and compassion to the drug approval process. It recently published a paper by Mark Flatten, titled “Studied to Death: FDA Overcaution Brings Deadly Consequences.” Flatten examined the FDA’s approval process and made some important recommendations. Flatten criticized some FDA practices, saying, “Instead of having to prove a new treatment is safe for its intended use, the FDA now reviews drugs based on how they might be used by doctors to treat individual patients, effectively substituting the judgment of agency regulators for that of practicing medical professionals.” He added: “Instead of proving a drug achieves the medically beneficial results that its makers claim, the FDA requires proof the new treatment will improve long-term outcomes. So it is no longer enough, for instance, to prove a new drug will reduce blood glucose levels for diabetics. Drugmakers must show, somehow, that this will make patients live longer.”

One Goldwater Institute suggestion is to allow drugs approved in certain other countries, such as Canada and the European Union, to receive nearly automatic U.S. approval. After all, those countries have drug regulatory structures similar to that in the U.S. Why should treatments approved in those countries not be available here?

The Goldwater Institute is also calling for a bill to restore free speech in medicine. It thinks Congress should allow drug manufacturers to provide information about “off-label use.” This is a common practice in which doctors prescribe FDA-approved drugs to treat conditions other than those the FDA originally approved them for after new beneficial uses arise.

Strong evidence of FDA over-caution bias comes in the 1974 words of then-FDA Commissioner Alexander M. Schmidt: “In all of FDA’s history, I am unable to find a single instance where a congressional committee investigated the failure of FDA to approve a new drug.”

From Lewrockwell.com, here.

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