Freedom Makes All the Difference

Mitt Romney's controversial comments about economic development overlooked a key variable.

Palestinian leaders were understandably insulted when Mitt Romney, noting the huge gap in wealth between Israel and the West Bank during a speech in Jerusalem on Monday, declared, "Culture makes all the difference." Although culture plays an important role in economic development, the presumptive Republican presidential nominee overlooked another key variable: government.

Good government establishes conditions that are conducive to production, innovation, and trade. I am not talking about the roads, bridges, and public schools cited by President Obama in his notorious "you didn't build that" speech. I am talking about a more basic kind of infrastructure: the rule of law, protection of property rights, enforcement of contracts, honest and open government, tolerable taxes, and a minimum of interference with transactions between consenting adults.

When the state flagrantly flouts these principles, people do not prosper, no matter how much they value education, how hard they are prepared to work, how much risk they are willing to take, or how inclined they are to save and invest. In fact, oppressive, arbitrary government changes culture, making these traits less valuable and therefore less common.

When Romney said "culture makes all the difference," he was quoting The Wealth and Poverty of Nations, a 1998 book by the historian David Landes. Elsewhere in the book, Landes is less categorical, saying "culture can make all the difference" (emphasis added) and cautioning that "culture does not stand alone."

What else makes a difference? Landes is quite clear that limits on government are essential. When he says "the driving force" of economic progress during the last millennium "has been Western civilization and its dissemination," he is referring not just to cultural values such as thrift, competition, gender equality, and the Protestant work ethic but also to the political values that keep the state from smothering creative effort.

Saeb Erekat, a senior adviser to Palestinian President Mahmoud Abbas, highlighted the importance of political institutions when he complained that Romney "doesn't realize that the Palestinian economy cannot reach its potential because there is an Israeli occupation." Israeli checkpoints, control of imports and exports, and interference with land use, even if justified by legitimate security concerns, surely have impaired economic development in the territory administered by the Palestinian Authority, but so has the authority's history of corruption and incompetence.

Those factors, along with intermittent violence, go a long way toward explaining the enormous difference in per capita GDP between Israel and the West Bank (which Romney actually understated by a factor of five): $28,600 vs. $2,900, according to the CIA's 2009 numbers. There are also stark, though less dramatic, disparities between Israel and bordering Arab countries. According to the CIA's 2011 estimates, per capita GDP was $31,400 for Israel, $15,700 for Lebanon, $6,600 for Egypt, $6,000 for Jordan, and $5,100 for Syria.

One interpretation of these data—the one Erekat clearly had in mind when he called Romney's remarks "racist"—is that Arabs are lazy, while Jews are good with money. Yet Arabs excel economically in countries with stable governments that respect individual rights and the rule of law. In the United States, for instance, Arab-American households are more affluent than the average.

A similar pattern can be seen among the Chinese, who, Landes observes, "have long been so unproductive at home and yet so enterprising away." The laissez-faire Hong Kong Special Administrative Region—which has a per capita GDP of nearly $50,000, compared to $8,500 in the rest of China—shows it's not distance but rules that matter. Likewise, East Germany's per capita GDP was about half West Germany's in the decades before unification, while South Korea's is about 18 times North Korea's.

Culture matters, but these examples demonstrate that institutions are crucial. If you compare per capita GDP to ratings in Freedom House's annual Freedom in the World report or the Heritage Foundation's Index of Economic Freedom, you will see a clear association between poverty and tyranny. Maybe Romney should have said, "Freedom makes all the difference."