New at Reason

Julian Sanchez | March 13, 2006

"Undercover Economist" Tim Harford travels to the "armpit of Africa" in an attempt to discover what keeps the developing world from developing.

Comments

|3.13.06 @ 4:08PM|#

I sort of want to shoot myself after reading that.
Still, the big unanswered question is: "How is it the United States' fault?" I need to go ask some university professors.

|3.13.06 @ 4:14PM|#

Another way for a roving bandit to homestead profitably is to receive a regular stipend of charity money for his inaction.

|3.13.06 @ 4:31PM|#

We still don�t have a good word to describe what is missing in Cameroon

Sure we do. It's called "honesty".

"Empathy" might also work.

|3.13.06 @ 4:40PM|#

I sort of want to shoot myself after reading that.
Still, the big unanswered question is: "How is it the United States' fault?" I need to go ask some university professors.

becosue the left controlled the US government for most of the 20th century at the same time while these policies that benifit incompetent cleptocracies and discurage open responisve government were created. They also have an iron clad mind set that has filled the minds of many americans that any attempt to change these policies would be equvalent to starving the poor. So the right is forced (and libertaraians becouse they hitched thier post to the conservatives) are forced to comprimise with the big government conservatism (compasionate) of the Bush administration in order to get someone elected.

or something...

|3.13.06 @ 4:57PM|#

So what was different with Chile, India, and the other coutnries mentioned that did bring themselves out of poverty? More of a cultural connection between the people?

|3.13.06 @ 6:07PM|#

The developed economies of many of the East Asian "tigers" have had kleptocratic leadership; the main difference though, it seems, was in the percentage that they chose to skim off the top, and the percentage that they reinvested in meaningful infrastructure. Thomas Friedman illustrated this in a little story of two interior ministers in "The Lexus and the Olive Tree"...

|3.13.06 @ 6:19PM|#

So what was different with Chile, India, and the other coutnries mentioned that did bring themselves out of poverty?

You could argue that China and India haven't really pulled themselves out of poverty yet, although they both have made strides.

I imagine most people reading this already know about the Fraser Institute's World Economic Freedom Report. (I don't remember if I heard about it through Reason or FEE). If you want a quick refresher:

http://www.freetheworld.com/release.html

Not surprisingly, Cameroon is ranked around 100. Looking at the data, the correlation between economic freedom and wealth is so obvious you'd have to have an advanced degree to miss it.

One really interesting (if off-topic) point is that one of the researchers noticed a correlation between economic freedom and peace - on page 22 of the executive summary, it reads:

When measures of both economic freedom and democracy are included in a statistical study, economic freedom is about 50 times more effective than democracy in diminishing violent conflict.

The impact of economic freedom on whether states fight or have a military dispute is highly significant (at the 1% level) while democracy is not a statistically significant predictor of conflict.

Of course, this may have changed a bit (the extent to which it is statistically significant, anyway) with Dubya's Iraq war.

|3.13.06 @ 6:35PM|#

At first glance the new library was impressive. With the exception of the principal's palatial house, it was the only two-story structure on campus. Its design was adventurous: a poor man's Sydney Opera House. The sloped roof, rather than running down from a ridge, soared up in a V from a central valley like the pages of an open book on a stand.

Sounds like the architect was inspired by the Derek Zoolander Institute for Kid's who can't Read Good.

|3.13.06 @ 6:37PM|#

Cameroonians are no smarter or dumber than the rest of us.
Any evidence to support that assertion? Harford's article provided evidence to the contrary.

Seemingly stupid mistakes are so ubiquitous in Cameroon that incompetence cannot be the whole explanation.
Sure it can.

Either the principal was so stupid that she did not realize water ruins books, or she did not care very much about the books and simply wanted to demonstrate that the library had some books in it. The second explanation seems more likely.
The second explanation is the same as the first explanation: stupidity. A 100% greedy non-stupid principal would realize that a non-stupidly designed, useable library is more valuable to him than is a ruined, useless library.

|3.13.06 @ 6:55PM|#

When I was in Ecuador last year, I spent a little time with my uncle in law, who is a local. We talked a bit about the economy. He and my brother in law both made the following comments:

A large part of the reason every business is a family business is that you can't trust anyone else you hire not to steal from you. The idea of giving an employee the keys to the delivery truck was depressingly comical.

The middle class is nearly all government employees.

They felt they had a corruption problem, but it was nothing like the Mexicans (sneer). The vibe is that the police on the street won't jack you, which is good, but they will kill you with permit requirements. The public sector which dominates the middle of the economy creates barriers to competition from the private sector at every turn.

|3.14.06 @ 2:03AM|#

Jason Ligon,

Hernando de Soto makes a similar observation and explains that the lack of a clear, secure system of property rights and the poor enforceability of contracts are at the heart of the problem there.

|3.14.06 @ 2:48AM|#

{We still don?t have a good word to describe what is missing in Cameroon

Sure we do. It's called "honesty".

Comment by: Russ 2000 at March 13, 2006 04:31 PM }


Funny thing, but that's the exact same word that popped into my mind when I read the piece; I read it before coming here and reading your post. Could lack of morality or if you prefer, honesty, be the cause of the rot that Harford describes? I personally would say yes,...or in part, at least. It seems that a set of circumstances has arisen in which it does not pay any individual to be honest. The other part of the problem seems to be that no one cares to think ahead any further than the end of his nose; why bother, if one cannot count on anything in the future?

Harford said something in the first half of his article that really struck a chord in me: he mentioned something about the Camaroonian Government not being able to efficiently collect taxes, because, for one reason or another, it could not tell how much wealth was available or if citizens were paying what they should. He mentioned this as a reason for the widespread government corruption. Obviously, if the average person is as corrupt as the government officials, he is not going to be honest about paying taxes. Even if that person is not corrupt, will he pay taxes AND bribes, and get ripped off twice? How many are that stupid? This becomes a viscious cycle....less honesty about taxes etc. breeds more stealing by officials, which breeds more dishonesty and lack of initiative.

What is really scary is that I see the same process beginning to take root in the United States. Think about it: government cannot really keep track of all the money and wealth in this country either. The entire taxing structure from the Feds on down to the local level depends on people "voluntarily" paying their legal tax obligation; that is, it depends on people being "honest" and not cheating. It depends on people being willing to support their communities, states and country. And up until the last twenty or thirty years that's the way that it's been.
But what happens if citizens, for one reason or another, no longer care to practice conventional morality? What happens if the productive segment of the population decides that it is better off paying itself first and government last, if at all? What happens if that segment sees that no matter how much it pays, the damned government at all levels keeps wanting more? And wasting more? And getting larger all the time? What happens when half the population gets tired of supporting the other half as well as half the world on top of THAT? And if taxes aren't bad enough, they get to contend with the purchasing power of anything they can save steadily being eroded through government sponsered and sanctioned monetary inflation. In short...what happens when people get tired of being SUCKERS?

|3.14.06 @ 7:48AM|#

JW: In the U.S., the taxing system is voluntary only for the self-employed; everyone else has the taxes withheld from their paychecks. Employers have little incentive not to withhold, and large disincentives in the form of penalties which are the most strictly enforced in the Internal Revenue Code. In my experience as a tax attorney, anecdotal of course, no one who is self employed is honest on their tax returns. The IRS occasionally audits the self-employed, but this is pointless because by the time the audit takes place, the self-employed taxpayer has already spent the money. A credit-invoice VAT is the only answer to this problem. I would allow W-2 taxpayers to get a VAT credit at the end of the year on their income tax returns, then we would start to get some horizontal equity in the system.

|3.14.06 @ 8:13AM|#

Screw you, Ron. I'm self-employed and I'm honest on my tax return.

|3.14.06 @ 9:08AM|#

Don't call me stupid!

|3.14.06 @ 9:31AM|#

Real Bill: Glad to hear it. I will revise my assertion to "all but one self-employed person cheats". Actually, I once knew a waiter who dutifully added up his tips every night and reported the income on his return, so that makes two people who report all of their non-W-2 income.

Human nature is pretty much the same across the world, but the political, legal, economic and cultural differences can either reduce or enhance the worst qualities of people. The systems that keep people honest are ones that do not rely SOLELY upon each person holding themselves accountable. Systems that assume everyone is dishonest don't work too well, either, because people tend to live down to expectations.

The Wine Commonsewer|3.14.06 @ 9:39AM|#

Someone please tell me how modern Africa is better off than Colonial Africa was.

Secondly, I believe the armpit of Africa kind of encompasses a lot more real estate than anyone wants to admit.

Ron, some self-employed people cheat on their taxes. While many others do not, a significant number tend to be aggressive in claiming deductions.

I suspect that there is a definition problem here and I can assure you that business owners often have a different definition of cheating than the IRS does.

And lastly, there is no point in giving the tax boys any more money than you have to because they are going to spend it on stuff you don't like and flush the rest down a rat hole.

MP|3.14.06 @ 9:55AM|#

Ron,

Various studies have shown that people are far less likely to cheat on their taxes when the tax rates are judged to be reasonable. Today's rates are far from reasonable. Self-employed people are better exposed to their true tax burden, and are thus more likely to try and find ways to circumvent it.

The Wine Commonsewer|3.14.06 @ 9:56AM|#

One other crucial item about honesty. It doesn't matter what's on the tax return. The tape measure is how a person deals with other people. Honoring contracts and commitments, leaving other people's property alone, & handing the teller back the extra $20.00 when he counted out 6 twenties instead of 5. That's the stuff that counts.

Sure, I pay my taxes too, just like Bill. But that's mostly because the government has all the good guns and all I got is this Remington 12 guage. So, Ron, there's an example of a system that doesn't rely SOLELY upon each person holding themselves accountable.

|3.14.06 @ 9:57AM|#

Wine Commonsewer: As an attorney who has defended criminal tax investigations of small businessmen, I agree wholeheartedly with you that my clients often have a different definition of "cheating" than the IRS does. Unfortunately for them, that has not been particularly helpful to them in avoiding prosecution.

As for the definitional question, "cheating" consists of overstating deductions and underreporting income. I agree that some people may do one or the other, both, or neither. W-2 owners generally only have the opportunity to do the former, and that is limited because "out of wack" itemized deductions will trigger an audit.

The only people that believe small business owners are generally tax-compliant are their lobbyists in Washington. For only the most recent of zillions of articles on this topic, see http://www.forbes.com/entrepreneurs/entrefinance/2006/03/01/entrepreneurs-irs-taxes-cz_jn_0301beltway.html

|3.14.06 @ 10:05AM|#

MP: I understand the libertarian desire to link voluntary compliance to tax rates, because that means we don't need to have more governmental enforcement (and we get lower taxes to boot), but the evidence you cite is self-proving, because someone who thought their tax burden was fair would undoubtedly be less inclined to cheat. The credit invoice VAT works so well from an administrative perspective because each consumer in the transaction chain has an incentive to report the tax so they can get credit for it from the next person they sell to. It really has nothing to do with honesty. The system works so well, in fact, that the Republicans rejected it out of hand when considering tax reform legislation.

fyodor|3.14.06 @ 10:27AM|#

Someone please tell me how modern Africa is better off than Colonial Africa was.

How about significantly less forced labor.

|3.14.06 @ 10:46AM|#

For those who are interested, the Heritage Foundation is unabashed in saying that it opposes the credit invoice VAT because it is too effective at raising money.
http://www.heritage.org/Research/Taxes/TaxPanelMemo05.cfm

I am fascinated by the conflation of tax administration with tax policy. Wouldn't it make more sense to simply limit Congress' power to raise rates? Or are they arguing that we can't do that consitutionally, therefore we should circumvent the constitution by making sure that whatever tax system we have is inefficient? Now we are beginning to sound like Cameroon.

|3.14.06 @ 11:21AM|#

That library sounds like a microcosmic version of North Korea's Ryugyong Hotel

|3.14.06 @ 11:53AM|#

besides not respecting property rights, how is Camaroon not a libertarian paradise?

|3.14.06 @ 12:27PM|#

Ron,

There is now way in hell we will have a VAT instead of our current tax system. If you implement a VAT you'll get it on top of our current system, warts and all. Therefore if you care about honesty it is irrelevant if we have VAT in addition to our current system, and if you care about limited government you'd fight tooth and nail to prevent the VAT for those reasons.

|3.14.06 @ 12:28PM|#

Cameroonians are no smarter or dumber than the rest of us.
Any evidence to support that assertion?

I already knew that the assertion was an example of a "moral fallacy," and that the evidence actually shows the opposite. (Is this "Reason" magazine or "Morality Play" magazine?)

Several sets of (admittedly imperfect) testing report that the average IQ in Cameroon is about 70, i.e., the typical Cameroonian is mildly retarded by western standards.

Assuming a Gaussian distro with STDV=15 (generous), that means only about 2% of Cameroonians have IQs above 100; about .16% have IQs above 115, which is about what you need to be a doctor or run a fairly complicated business. With a mean IQ of 100, those percentages are 50% and 15%, respectively. Note that 15% is about 100 times greater than .16%.

From Scientific American (a nice liberal mag) Presents "Exploring Intelligence" -
"Adults in the bottom 5% of the IQ distribution (below 75) are very difficult to train and are not competitive for any occupation on the basis of ability." That accounts for about 65% of all Cameroonians. No wonder the place is fucked up.

|3.14.06 @ 12:42PM|#

Regarding the point of the thread:

Cameroon is screwed precisely because of a lack of property rights. You can't defend yourself in court against someone who does not pay you what they owe, and government employees can exact an arbitrary tax for their own pockets any time they want to.

How to establish effective property rights is the billion dollar question. In the meantime any and all aid to that country will clearly not go to help the poor, just to help those in government power increase their bank accounts.

If said aid comes in terms of lending to the government, then it does worse than accomplish nothing, it creates a burden for the poor citizens of the country.

|3.14.06 @ 1:05PM|#

One thing I've noticed about the countries that are, or are becoming, economically advanced is that almost all of them are also culturally advanced--that is, they have what is usually referred to as a "high culture."

Think about it--a place like Cameroon is the classic example of a primitive tribal culture with a thin overlay of western technology and beliefs. But places like India, China, Japan, Korea, etc. have their own advanced cultures that go back, in many cases, to a time when my Germanic ancestors were running around in skins and painting themselves blue.

I don't pretend to be able to explain this phenomenon entirely, or to claim it as some magical explanation for everything, but it shouldn't seem that surprising that societies with pre-existing advanced cultures should be the ones that embrace science, technology, and more complicated societal constructs like property and individual rights, as compared to societies that are culturally only a rung or two above the state of nature. In a way, the bigger question is why China, Japan and India got so far behind the West in the first place.

Of course, there are undoubtedly exceptions to this theory, and those might be the more interesting ones to study.

|3.14.06 @ 3:47PM|#

Happyjuggler: I agree with you on the VAT not being a good idea as an add-on to the income tax. Of course, that is a non-sequitur if we are talking about the VAT in comparison with other proposed tax systems that themselves would be a complete substitute for the income tax. I suspect the real objections to the VAT have to do with its greater effectiveness than other systems. In other words, "if you are going to tax me, then at the very least allow me to cheat". That is pretty morally bankrupt reasoning, though.

The Wine Commonsewer|3.14.06 @ 4:48PM|#

Fyodor,

How about significantly less forced labor.

You may have to qualify that by saying less forced labor at the hands of European powers. Not saying that your statement is inaccurate but even if true the benefit is totally offset by the offenses against humanity in places like the former Rhodesia.

The Wine Commonsewer|3.14.06 @ 4:52PM|#

Oh, and I suppose I should say that I'm not defending European colonization of Africa.

The Wine Commonsewer|3.14.06 @ 4:59PM|#

Ron, your sample of the business populace is skewed. :-)

IMO, most people who are looking at a criminal investigation from the US Attorney on tax matters are well past a misapplication of tax regs.

It's a rare day when the tax boys prosecute somebody for authorizing an all-expense-paid board of directors meeting in Maui that lasted three weeks.

|3.14.06 @ 5:50PM|#

Mr. Wine: You would be amazed at what people get prosecuted for. As for the statistical accuracy of my sample, take a look at the Forbes article I gave the link on. Nothing in my experience contradicts the IRS data. If anything, they are understating the case. I have had many clients who admitted to intentionally concealing and hiding income (under the attorney client privilege, of course), and it is pretty easy to go into any cash-based business and watch them skim. If you don't think most small businesses skim, it's because you haven't been paying attention.

|3.14.06 @ 7:04PM|#

Think about it--a place like Cameroon is the classic example of a primitive tribal culture with a thin overlay of western technology and beliefs. But places like India, China, Japan, Korea, etc. have their own advanced cultures that go back, in many cases, to a time when my Germanic ancestors were running around in skins and painting themselves blue.

Shhhh! You're not supposed to notice things like that.

|3.14.06 @ 10:17PM|#

Le Mur,

It sounds like you have read, "The Bell Curve". The whole point of that book was that bad things happen to stupid people. Cameroon sounds like an interesting place to visit though.

The Wine Commonsewer|3.15.06 @ 12:41AM|#

Ron, it was a joke, son. Your sample is skewed because they're ALL criminals. If they weren't accused in the first place they wouldn't be standing tall in front of your desk.

The Wine Commonsewer|3.15.06 @ 12:47AM|#

Interesting, I used that first statistic in a blog post recently (having to do with the push to audit S corps for statistics).

BTW, speaking of S corps, can S corp shareholders be assessed for the corporation's built in gains tax after conversion from C to S?

Thanks.

The Wine Commonsewer|3.15.06 @ 12:48AM|#

Oops, not being clear above. I meant that note in the context of Ron's link to the Forbe's article and should have addressed it as such.

|3.15.06 @ 7:32AM|#

Mr. Wine: I didn't make my background clear. I am a tax attorney who does mostly civil tax controversy work, with occasional criminal tax defense work. The majority of my clients do not consider themselves "criminals", and most are not. That doesn't mean they don't push the envelope from time to time (before checking with me:-)). When I say "cheating", I don't necessarily mean offenses that would likely be prosecuted. Cheating is, of course, largely a function of opportunity. Self-employed people have greater opportunity under an income tax system, which is why I favor dumping the income tax, even though I've worked with it for 25 years.

Regarding your question about the built-in gains tax, I've never looked at the issue specifically, and couldn't give a definitive answer without looking at it more closely, but the tax is imposed on the S-Corp's income as if it were still a C corp, so on the one hand it is primarily the corporation's liability and should be paid by the corporation. But what if, as in many cases, the corporation distributes all the income to the shareholders and has no assets? I have a lot of expertise in the area of transferee and third-party liability for taxes, and I could see the IRS using a state-law based "corporate trust fund theory" to go after the officers and directors of the corporation for knowingly making the corporation insolvent. This might apply even if the payments out of the corporation were for legitimate expenses. Transferee liability could also apply, if the IRS could show that the corporation made distributions to shareholders at a time when it was apparent that it would be unable to pay its tax debts. So, I wouldn't be sanguine about shareholders escaping liability in that situation, but this area of the law is murky.

The Wine Commonsewer|3.15.06 @ 1:31PM|#

Ron, thanks for the info and thanks for the conversation re: tax cheatin' scoundrels who sometimes run afoul of the IRS.