The Profound Irrelevance of Corruption, Institutions, And Ease Of Business To Economic Growth

That title sure caught you attention? Good. Now for the 1000-words-in-a-picture evidence.


Human capital refers to educational attainment, as measured by the results of the PISA and TIMMS standardized tests*. As you can see, there is a very close correlation between human capital and GDP (PPP) per capita. The exceptions all confirm the rule. For now I have only done the post-socialist space, because of its sheer variety – different cultures, different rule-of-law and ease of business environments, difference resource endowments and political systems – which lets me illustrate just how irrelevant all those factors are compared to human capital. The same laws hold at the global level, and I intend to cover it in a consequent post, but that involves a lot more work so for now I’ll just settle for this.

The Near Developed nations have respectable GDP per capita (approaching the poorer members of the classical developed world, such as Portugal and Greece), and levels of human capital that are basically equivalent to those of the rich countries. They are close to converging with the developed world, so growth tends to be relatively slow by the standards of more dynamic (but much poorer) emerging markets, on the order of 3%-5%. Despite their low positions, neither Russia nor Latvia are outliers; more recent calculations by the World Bank give Russia a PPP GDP of $20,000 for 2010, wedging it in with Hungary, Poland, and Lithuania; while Latvia was very severely affected by the late recession. The Czech Republic is close to being a positive outlier: One reason may be its proximity to developed Germany, another the early start of its reforms.

The Red Train is, basically, China. Its searing growth rates aren’t because of its state capitalist system or the Confucian work ethic, but because its human capital is wildly out of line with its economic development. Its high school graduates are ready to operate complex machines and staff the most hi-tech enterprises, but the legacy of Maoist economics – which, hard as it is to believe, were even more inefficient and offered fewer incentives than under Soviet central planning – means that a significant share of the population still uses oxen-pulled plowshares for farming. So it is no wonder that, with its markets freed, the system is straining to catch up – at the pace of 10% per year – to its equilibrium place along with South Korea and Japan. Note also that according to some estimates, China’s PPP GDP is now larger than America’s, which would give a per capita level of $10,000 or so; significantly higher than the figure displayed on the graph.

The Slow Middle are countries with moderate levels of human capital, and they are significantly poorer than the Near Developed nations; for them, convergence to developed country levels is still far away. Their growth rates are modest because their economic development is only slightly, if at all, below the level natural for their degree of human capital. While Turkey and the Balkan countries don’t look that far away from the poorest Near Developed countries, it should be noted that all three are currently suffering from major disbalances that could well end up in Latvian-style crashes. To set themselves on a sustainable development path, they will have to raise their human capital levels by at least another notch. The two negative outliers are Ukraine and Armenia. Ukraine has just been horrendously mismanaged; as I argued in a prior post, it never left the period of “anarchic stasis” that characterized Russia in the 1990’s. That said, the Ukraine may not so much of an outlier; its prices are low, and salaries are comparable to Serbia’s, so its PPP GDP may well be substantially underestimated. Armenia is an even more glaring outlier, with human capital that is comparable to the weaker Near Developed members, but I suppose huge military spending and being blockaded on two sides, and bordering Georgia and Iran on the other two, isn’t conductive to prosperity.

The Doldrums consist of Georgia and Moldova. Georgia has had good management under Saakashvili (it is now far less corrupt than Russia, or its Caucasian neighbors, and Ease of Business is very good by global standards), and Moldova has had bad management; nonetheless, their differences in GDP per capita are modest. The problem is that their schools produce people who are, largely speaking, functionally innumerate; so no matter how hard Saakashvili wills it, Georgia isn’t becoming a Singapore of the Black Sea any time soon. Sustained convergence to developed country levels is out of sight; radical improvements in human capital will first have to be made, and they can’t happen in the space of a few years; they require decades. The Saved By Oil group include Kazakhstan and Azerbaijan. They are as wealthy as the Slow Middle, but as stupid as the Doldrums. But in a world of high oil prices they should be relatively well off.

Kyrgyzstan is in the Third World. Although its Soviet-era legacy has enabled it to provide universal primary schooling, the quality of the products of that schooling is comparable to India – at the very bottom of the global heap. It may achieve decent growth of perhaps 4% or 5%, but it will be from a very low base.

There are several conclusions to this. First, there are only really three important factors to economic development. First, above all, human capital, i.e. primarily, the quality of education. It makes sense on an intuitive level and there’s a ton of literature in support but the graph above makes it… graphically clear. Second, resource endowments, when highly concentrated per unit of non-resource extraction based GDP – as in Kazakhstan and Azerbaijan, but not quite in Russia – will hugely, and positively, influence the level of GDP (it does play a substantial positive role in Russia but it should be noted that Russia’s oil production per capita is less than Canada’s, and its oil production per unit of GDP is far less than Kazakhstan’s or Azerbaijan’s). Third, political management. Especially incompetent regimes such as the ones in Ukraine will hold it back from achieving the full potential enabled by its human capital; if its monstrously incompetent and repressive of growth, as in Maoist China, the resulting gap between reality and potential can develop to truly vast proportions; consequently, when the most egregious barriers are removed, as during the late 1970’s, growth takes off at truly prodigal rates.

Equally important is the fact that things commonly cited by Thomas Friedman, Davos Man, The Economist, The WSJ, The Financial Times, the respectable experts, etc. etc. as important for economic growth turn out to be largely irrelevant. Ukraine is more democratic than Russia and Kyrgyzstan is more democratic than China, but their growth profiles are much worse regardless. Russia is fairly corrupt – though not nearly to the extent implied by Transparency International’s Corruption Perceptions Index – and so is Hungary, and they both have much poorer Ease of Business indicators, but they are both much better off than cleaner and business-friendly Georgia. Latvia was part of the “clean” Baltics, but that didn’t stop it from tumbling to the bottom of the Near Developed pack in the wake of the global financial crash; is it too much of a coincidence that Estonia, which has a slightly edge in human capital, managed to hang in tight? The three biggest outliers by far in a best fit line on the graph – China, Kazakhstan, and Azerbaijan – are all patently explainable by a Maoist legacy and oil windfalls.

Suffice to say, most of the former socialist bloc – most of the world, in fact, but that’s for another post – is at precisely the economic development levels implied by their levels of human capital. There are exceptions, most especially China, but to a lesser extent also many of the poorer Near Developed countries, where the distortive legacy of central planning has resulted in lower current economic development levels than should otherwise have been the case had markets been allowed to function; nonetheless, they tend to compensate with respectable growth rates, as the reality – potential gap seeks closure. If you need to blame someone for why your country is poor, don’t bother trotting out the usual canards: State interference, authoritarianism, corruption, anti-Western policies, privatization and liberalization will solve everything! (liberal canards); neocolonialist exploitation (leftist canards); Russian exploitation (East European nationalist canards). More likely than not your countrymen are illiterate, innumerate slobbering buffoons and it’s as simple as that.

* Human capital was calculated by the average of PISA 2000 scores in Math and Science, and of TIMMS 2008 scores in Math and Science. Where data sets for both assessments existed for a particular country, the TIMMS score was – on average – around 7.7% higher than the PISA score, so I adjusted the former down by that amount. The human capital index was calculated by taking the average of the PISA and adjusted TIMMS scores where applicable, or either the PISA score or the adjusted TIMMS score where data for only one of them existed.


  1. I wonder if these total non-correlations are because there is no strong causal link between corruption/ease-of-business/institutions and growth, or because the international indices on these topcis are bunk. I suspect the latter is often the case.

    • I think that is exactly the case. The metrics used to evaluate corruption levels are simply inane contrivances that fail as metrics. “Corruption perceptions” vs. actual money paid in bribes and harassment by bureaucrats leading to business failure are not comparable in any way as metrics. In fact “corruption perceptions” has a circularity pathology where media reports about Transparency International’s list feed into the very perceptions it is measuring!

    • I agree that the CPI isn’t very reflective of reality (it’s called the Corruption PERCEPTIONS Index for a start), but most of the rest are pretty valid IMO. Besides…

      Take my Corruption Realities Index, which only uses objective factors to measure corruption. It still shows countries like Georgia, Bulgaria, and Brazil performing well – perhaps, surprising so. China performs much more poorly, but that doesn’t stop it from growing far faster (and from what is now a higher base than Georgia).

      Anecdotal evidence will confirm this; go on the Chinese Internet, and you will see people complaining about the corruption of CCP officials no less than Russians complain about their chinovniki. Yet average Chinese school-leavers are now very competent mathematically and scientifically, while the typical Georgian one – according to the PISA statistics – can barely solve the simplest equations. You can run an advanced factory or bank with a few kickbacks on the side but you simply can’t do it if the workforce isn’t up to it; that is why China is acquiring hi-tech industries, while Georgia has gone no further than tourism and wine in the 2000’s.

      The World Bank’s Ease of Business rankings I regard as highly reliable (especially after they recently dropped the stupid CPI as one of the factors for assessing them). They are very objective, relying on standardized measurements of the number of steps, the number of days and the costs of Starting Businesses, Getting Construction Permits, etc, etc. There’s little to dispute there unlike with corruption perceptions. Regardless, you will find that unless the situation is truly ridiculous – e.g., Ukraine, 150th, which might partially explain why it does much worse than say Serbia, 92nd or Bulgaria, 59th which have equivalent human capital – an economy’s particular ranking there will not have that big of an influence on its relative position in the global pecking order while the human capital effect dominates.

  2. From your lips to God’s ears, Craig; venture capitalists are all about risks and getting into an opportunity before anyone else spots it, so that it’s cleaned out before the rubes arrive. They don’t care a damn about corruption or the solidity of institutions provided their money is relatively safe (based on their own risk analysis, which might often look far differently than that of a long-term investor) and the potential exists to make a lot more. In fact, the development of stable institiutions and implementation of powerful anti-corruption measures are a deterrent to venture capitalism, as that element of the FDI sector relies on smash-and-grab opportunity.

    • The problem is that “corruption” is not differentiated as destructive or merely an additional cost of doing business. In spite of the supposedly high corruption levels in Russia it appears that there is no disruption of the economy. So the bribes are another “tax” that seems to be affordable.

      The western media has discovered corruption in Russia just when the sort of 1990s gangland warfare has all but vanished into history. Having your business being taken over by the mafia and having you or employees murdered in the process is not the same thing as paying some fire inspector off to prevent him temporarily closing your business. I know from contacts that this sort of bribery happened in the recent past in Toronto, Canada. So all this “corruption perceptions” ranking is pure rubbish.

      • Alexander Mercouris says:

        Dear Kirill,

        I agree with what you say as to the difference in corruption between Russia in the 1990s and today. I have been following closely the Abramovich/Berezovsky trial here in London, whihc makes your point.

        I have said this on another blog, but we used to have a bitter joke in Greece in the 1960s describing the three types of corruption, which I think is both amusing and pertinent:

        1. There is a hospital but the staff will not treat you unless you bribe them;

        2. There is a hospital but no one will treat you because the manager is pocketing the staff’s wages who therefore do not bother to turn up for work;

        3. There is supposed to be a hospital but no one will treat you because the money to build the hospital has been stolen by the person who was contracted to build it who is a friend of the minister’s.

        There is some truth behind this joke. If you take it seriously then I would say that in Russia today corruption is of the first sort but not of the second or third. In the 1990s it was a mixture of the first and the second. My understanding of the situation in Georgia is that it is a mixture of the second and the third. The point to understand (and the purpose of the original joke) is that corruption of the second and third sort though more dangerous than the first is much less visible than the first. This in my opinion is why (though I know many Russians disagree including perhaps Anatoly) though the power structure in Georgia is more corrupt than in Russia it is less visibly so. I should say that though I have never been to Georgia myself many Greeks I know have including a Georgian who was employed by my parents in Greece and who described Georgia in exactly this way. I have also read a study of Georgia by Chatham House (the Royal Institute of Strategic Studies), which hints at the same thing.

        • Thanks for the confirmation of my view that the Georgian corruption makeover is all optics and not substance. It’s too good to be true that some leader comes along (especially an incompetent tie eating puppet) and all of the sudden everyone is playing by the rules. You need totalitarian control for such results to just be approximated let alone achieved. (People remember Mussolini for reducing corruption). It will take a long time for the ex-USSR space to transition to an above the board, law-based lifestyle. Maybe it will never reach this state at all and the corruption will be repackaged and “legalized” just like it has been done in North America.

          • As I’m sure I mentioned before – although hopefully not here, in which case I’m repeating myself – when my wife and I got married in Russia, the circumstances made it impossible to comply with the rules as written. A visitor’s visa is only good for 30 days, and once you figure in travel time you are probably down to 28 days actually in the country. You have to advise of your intent to marry 30 days in advance of being allowed to do so. An exception may be made if the prospective bride is in the family way (and there were other potential exemptions, but I forget them and they did not apply to us), which requires a doctor’s certificate confirming pregnancy.

            I was in despair when I learned this; no doctor would write such a certificate knowing the subject was in fact not pregnant, I reasoned. In a couple of days we had two prospects, one of which we settled on and duly received our certificate. We gave the doctor a good-quality box of chocolates for her kindness.

            Technically, that was a bribe. Technically, she broke the law, and so did we. Practically, it allowed us to get around a regulation that would have made it impossible for us to marry. No gratuity was ever invited or specified, it was just something we did to say thank you for helping us navigate a complexity we could not have done on our own.

            I’m sure there are many bribes that are criminal, and that discourage builders from bidding on contracts, service industries from advertising their availability and which tax some small businesses to the limits of their capabilities. But I wonder how many bribes fall in the former category – the imprimatur of officialdom exchanged for a minor gratuity in order to get around the complexity of that same officialdom.

            I don’t mean to make the practice seem prosaic or cute, but I believe its impact is greatly exaggerated. Rather than a negative reflection on Russians’ honesty and integrity, it seems to me to reflect an ad hoc system of getting around difficulties imposed by often-archaic rules. I am very much in favour of legal simplification and reform that would, I believe, make bribes much less common and distinguish those that remain as criminal rather than imposed reality.

            • Russia very much needs to have its bloated and ever expanding bureaucracy pruned to the the trunk. This includes removing nonsensical regulations and the ability of petty officialdom of creating them whenever it wants. The growth of the bureaucratic parasite organism has been one of the prime failures of Putin. But this may say more about his lack of real power and not about his policies in spite of the image being fed to western media consumers that he is some sort of dictator.

            • Moscow Exile says:

              In the hopes of also not repeating here what I have possibly mentioned before, I have lived in Russia now for almost 20 years, where I met and married my Muscovite wife in Moscow in 1997, since which marriage she has borne me three children.

              I have said many times to compatriots and other native English speakers here in Russia that I have neither paid a bribe to anyone during my residence in Russia nor has it ever been suggested that I do so. This statement usually causes great surprise amongst exiles of my acquaintance, engendering the response that either I have been unbelievably lucky or that I am an out and out liar. The last time I was accused of mendacity as regards my non-payment of bribes was when my interlocutor recently asked me how much I had paid to have my youngest enrolled in the kindergarten situated round the corner from my house. He claimed that he knew of no other expat in Moscow who had not paid a bribe so that his child could attend a preferred kindergarten.

              I suspect one major reason why I have never been in a situation where I might have considered paying a bribe is that I am not and never have been a motorist. However, I should add that on two occassions when my wife was in maternity hospital, I paid a gynaecologist a sum of money in order to ensure that my wife receive the best medicine and treatment available. That does not mean that if I had not done so, that my wife would have been denied treatment; it would have only meant that she would have received only the basic treatment available in a Russian state hospital.

              When my wife was ready to be discharged after both deliveries, I showed my gratitude to both doctors with the usual gift of flowers and chocolates.

              I still do not consider those gifts and payments, which amounted to $200, to have been a bribe.

    • I wouldn’t go as far as that Mark.

      I think bad institutions or corruption are hardly ever a positive factor, but that their importance as negative factors is massively overstated in conventional discourse. They can become debilitating when they reach a critical extent – e.g., Russia in much of the 1990’s, and arguably Ukraine well into the 2000’s – but otherwise don’t play much of a role. China has very poor institutions, with developers stealing land in cahoots with corrupt officials, and constantly skimming off money on infrastructure projects, etc., but this hardly puts a dent in their ongoing boom.

      I completely disagree that venture capitalists dislike corruption, their preference for countries like the US or Israel (or for that matter Skolkovo in Russia, which has been specifically segregated from Russian bureaucratic interference) speaks to the opposite. That said, while they are the source of much attention, venture capital and FDI are both, in most cases and countries, fairly marginal to economic growth. It’s just that they are tend to be concentrated in the most exciting sectors (e.g. hi-tech) so they are the source of much attention.

      • I completely disagree that venture capitalists dislike corruption as well, which is what I thought I said; “They don’t care a damn about corruption or the solidity of institutions…”. And while its true venture capitalists do have a fondness for the USA and Israel, the USA is a place where money talks (meaning that while it might not experience Russian-style corruption, it is….ambitious), and Israel is a full 10 places below it. Besides, any sensible portfolio is diverse and includes a mix of investments – some safe, and some less so. And while the Russian Federation is a little below the middle in ranking (51 of 80) on the VCPE Country Attractiveness Index, it is above Brazil, which is reckoned by many to be the pearl of emerging economies. Companies like the loathsome Hermitage Capital Management, which went from startup in 1996 to best-performing fund in the world in 1998, argue that venture capitalists are not put off by corruption to anything like the extent their responsible investing seminars might suggest.

  3. Alexander Mercouris says:

    Dear Anatoly,

    This is a very clever and actually brilliant article, which will make quite a few people choke.

    I would make a few qualifications:

    1. A fundamental requirement for economic progress is political stability. If a country is politically unstable then this will affect its economic prospects. One of the reasons for China’s economic growth is precisely that the political situation in China has been so stable;

    2. Economic growth requires a government that is both strong and committed to achieving it. This requires an effective system of state administration without which nothing is possible. This is true by the way even in the most liberal and least interventionist states. Corruption can affect economic growth if it is so pervasive that it weakens the administrative system and makes it ineffective. This is what you see in many Middle Eastern and African countries and even to some extent in Latin America and (yes) in India;

    3. The government must be both pragmatic and (even if only to a certain degree) patriotic. If a government has lost touch with economic reality (as happened in China during the Great Leap Forward and the Cultural Revolution) or thinks purely in terms of the self enrichment of its members and of the social groups who support it (as is true in many Middle Eastern and African states) then sustained economic growth will not happen.

    There are too many examples of economically successful authoritarian systems to make the equation of economic growth and democracy sustainable. As for many of the other mantras about diversity, competition etc, these are purely ideological and if pressed too far are every bit as detached from reality as the nostrums of say China’s Maoist era.

    (@ Anatoly, viz your comments about the Soviet economy, there is in my opinion no good economic history of the USSR. Contemporary discussion of the Soviet economy including in Russia is heavily distorted by ideological prejudice and is coloured by the economic problems the USSR was experiencing at its end. The same has been true of the German economy of the Nazi era, which is only now in the process of being thoroughly reassessed – see for example Wages of Destruction by Adam Tooze. We are very far from the point where we can expect comparable studies of the Soviet economy. When we do I suspect we will find that the Soviet economy was actually in many ways a much more conventional economy with much more conventional techniques and methods of management than is often realised. I say this on the basis of my reading of Soviet economic discussions both in the Stalin era (specifically Stalin’s correspondence with Molotov and Kaganovich and the Politburo and Central Committee protocols of the period) and the memoir literature and interviews for the later Soviet period of the likes of Baibakov, Vorotnikov and Gerashchenko. Certainly there was never a flight from reality such as happened in Maoist China or in Russia in the early 1990s. I also think that there is far more continuity in economic thinking as between the later Soviet era and the present Putin era than is appreciated. Indeed I would say that Russia’s recovery since 1998 has been due less to the rise in oil prices and more to the return of economic rationality. Needless to say this is a massive subject).

    • Thanks for the detailed critique Alex.

      Some minimal level of political stability and integrity is a necessary condition, but IMO it is only a base one; for actual sustained development, one also needs to have the requisite human capital. I suppose there’s reverse causation as well, in that high human capital nations are at most times sufficiently organized to fulfill those base conditions.

      I’m far from a specialist on the Soviet economy, and have mostly read only critical accounts. But on the other hand, it’s very hard to argue for a system in which farmers at times found it more profitable to feed livestock bread than grain! Or where 25% of the potato crop withered away in transport. Or where there were constant shortages of basic consumer goods like shoes and sausages. I accept that the MIC was actually fairly efficient, but here you have to take into account that (1) it was always massively prioritized in terms of the human and material resources allocated to it and (2) it had fairly vigorous competition between firms, e.g. MiG vs. Sukhoi.

      I agree with you that, hard as it is to imagine, but economic management under Maoism was far more inefficient even than Soviet central planning (itself hardly the highest bar). I’m currently taking a class on the Chinese economy and I’ve bee continually impressed, in a bad way, by the anecdotes and statistics trotted out. One thing that struck me in particular: Unlike in the USSR, which had a reasonable level of labor turnout (16% of workers left their enterprises in any one year to work for another), in China you were literally more likely to die on your job than transfer elsewhere. No incentives whatsoever for improving your human capital by getting an education, etc, as promotions almost entirely based on seniority. The share of the urban population actually DECREASED from the late 50’s to the late 70’s.

      Thanks for alerting me to the book Wages of Destruction. It sounds very interesting and just the kind of stuff I’m interested, have gotten it from the library today.

      • Alexander Mercouris says:

        Dear Anatoly,

        Thank you for the above comments.

        This is not a place for a discussion of the Soviet economy which in view of the limited academic literature is anyway at the moment impossible and which is anyway off topic. At the moment any view anyway has to be impressionistic. However what has struck me from reading internal debates on economic questions is how completely pragmatic and unideological Stalin and his lieutenants were. It is clear for example that Stalin and his lieutenants had no ideological aversion either to free market prices or to different forms of ownership and that they fully understood the importance of the price mechanism and how it worked. They also had a firm understanding (as did Brezhnev and Andropov but not Khrushchev and Gorbachev) of the vital importance of budget and fiscal discipline.

        The impression I have come away with is that the structure of the Soviet economy as it had evolved by the mid 1930s was the result of a pragmatic response to the challenge of developing an industrial economy in conditions of extreme capital shortage. This required ruthless allocation of resources to priority sectors (not just the MIC but such sectors such as chemicals, machine building and the energy sector, which today are Soviet legacies) with consequent tough control from the centre of investment, which in turn meant rigid control by the centre of wages and prices and of distribution. This created all sorts of anomalies in the economy of which Stalin and the economic leadership were fully aware but which they were obliged to accept in order to achieve their larger goals. However though this is never expressly discussed it seems clear at least to me that not even (or perhaps especially not even) Stalin ever imagined that this type of system of extreme economic mobilisation would be sustained indefinitely.

        By the 1970s a consensus had grown up within the country’s economic leadership that the economy had evolved past the point where the system as devised in the late 1920s made sense and plans were drawn up by Gosplan and the Finance Ministry for what would have been a major overhaul of the economy, which would have involved an incremental programme of phasing out subsidies and of freeing up and going over to a commercial system of prices. Contrary to the image of Brezhnev as a senile dunce he seems to have been kept abreast of these plans and to have approved them. In November 1979 he began a series of speeches in which he discussed the country’s economic problems increasingly openly in a manner that suggests that he was preparing the country for the change that was coming. When Andropov took over he seems to have been determined to press ahead with these plans but unfortunately he fell ill. When Gorbachev eventually took over he had totally different ideas and the rest is history.

      • Don’t forget the feeding of calfs with milk powder instead of cow milk.

        ps. Oh, it seems that i made a mistake. That happened in the EC not the USSR.

      • below_freezing says:

        I think you misunderstand the point of Mao’s policies and don’t understand the situation China was in in the 1920’s to 1949.

        In 1949, the average lifespan in China was 36 and only 10% of the people were literate, with less than 100 dollars per capita. That means China was 3 times worse off than Sub-Saharan Africa. Clearly, Chiang Kai Shek’s capitalist policies were total failures in mainland China. It would be madness to argue otherwise.

        Mao’s policies essentially discarded growth as a “desireable” objective and used surplus resources to fund social welfare and population growth. Even as the population doubled within 30 years, something miraculous happened that never happened in any other country with high population growth: people got better educated, lived longer and ate better, if not richer. The economy still grew anyways at 6% per year; just that population growth was also 6%. China still had enough incentive to discover artemisin and independently build thermonuclear weapons, nuclear submarines and ICBMs.

        Deng’s reforms were successful because they were built on the things Mao achieved: average lifespan higher than South Korea in 1976, higher literacy than India today(that would be a 8 times increase in literacy within 30 years!) and the technological base left behind by military research. If Deng started with the China of 1949, the reforms would have been total failures because you cannot build a modern economy on a 10% literacy rate and 36 year lifespan.

        The only problem of Mao was he died 10 years late. His best achievements were all in the 50’s, some in the 60’s, but 1966-1976 was a waste of a decade. If he died in 1966 instead of 1976, we’d have all of his achievements (ICBM, nuke subs, satellites, artemisin, stuff like that) and none of the bad (like the waste of 10 decades in CR). China would today be at 2/3 of South Korea’s level instead of 1/4, and be richer than Malaysia and nearly on par with Russia.

        There’s a saying in China: If Mao died in 1959, he would be the greatest hero China ever seen. If Mao died in 1966, he would still be the greatest hero China ever seen, but with some reservations. However, he died in 1976 so now we can only say he’s 70% correct and 30% wrong.

        • China in the 1920’s-1949 wasn’t exactly capitalist, it was mostly subsistence / traditional with warlords skimming off top. To the extent that capitalism existed it was in a few coastal enclaves that the central government had weak control over.

          That said, I should note that Taiwan’s and South Korea’s circumstances in 1949 were not significantly better, to the best of my knowledge, but nonetheless they are much richer today than China, by a factor of 3x-4x in GDP (PPP) per capita. In other words that’s a historical lag time of two decades.

          I make no dispute that China in 1949 was extremely backward. And I agree that the pace of social transformation as measured by basic health and education indicators was nothing less than miraculous. That doesn’t change the fact that economic development progressed at a miserly pace with frequent setbacks and outright insanities like the GLP and the CR. 6% GDP growth isn’t bad until one subtracts 2-3% to adjust for population growth; furthermore, it was concentrated in urban areas, the rural areas remained almost stagnant. While this was compensated for by social progress, the weakness was revealed after the reforms and the disbandment of the rural collectives, which caused the common funds for rural healthcare, etc. to dry up. As an example LE growth has slowed to a crawl since 1980, and remained outright stagnant in poor rural provinces. E.g. Jiangxi LE in 1990: 67.85; in 2005: 68.95.

          I heard of that quote about Mao, I agree with its essence if not the details. I’m not Chinese so my opinions don’t have much weight, but I’d say 50/50 at best. Maybe 40/60.

          • below_freezing says:

            Taiwan and South Korea were very special cases.

            Here’s why Taiwan was a very special case: Chiang Kai Shek took 400 tons of gold from mainland China and 2 million elites, and took them to Taiwan. 2 million elites sounds like nothing in terms of China’s overall population but it amounted to 15% of Taiwan’s population at the time being the educated elite. Note that China’s entire gold reserves TODAY are 1000 tons, starting from 0 in 1949.

            If you take 40% of an entire nation’s reserves and most of its educated elite, to a small island, and then get huge amounts of US aid, not succeeding would be the result of complete incompetence. Taiwan also enjoyed US military protection and a nuclear umbrella for 30 years. Because it was small, and had existing infrastructure from Imperial Japan, there was little need for large scale construction. Therefore, there was much surplus capital that could immediately be put to work on investment.

            Mainland China on the other hand had to spend significant resources on infrastructure engineering, power, basic social programs, and the military. We also had incredible population growth that Taiwan did not have. Resources had to be diverted from capital investment into state directed investment in food for the population, heavy industry, military and infrastructure, which set the stage for post 1979 reforms, but also kept per capita income low. It should be noted that despite this, China’s per capita GDP was comparable to Taiwan’s until the early 70’s, meaning that the Cultural Revolution was the main problem, not anything else.

            South Korea was similar, just replace Chinese elites with Japanese elites (President Park Chung Hee was a Japanese general) and US money. They also enjoyed protection and a nuclear umbrella.

  4. Just a quick note before I race off to the household chores: Ha-Joon Chang in his book “Bad Samaritans: the Myth of Free Trade and the Secret History of Capitalism” had a section on corruption and whether or not it hinders economic development. The point he made in the chapter is that bribes can encourage greater efficiency if the purpose is to overcome a situation of over-regulation, rigid bureaucracy or plain incompetence.

    For example, in some countries (Japan used to be notorious), all imports of a certain product might be handled through one customs office and that office deliberately under-funded and under-staffed because of laws passed by the government. In that situation, importers might pay bribes to the exporters or the relevant government official to bypass the customs office.

    Another point to consider is what effect is the bribe likely to have: does the money create and sustain jobs or will it go into a secret overseas bank account?

    • Ha-Joon Chang sounds Korean. A country in which no government contract has ever been singed without a kick back. It is also the country that grow the most in the last 50 years

      • He is indeed Korean, he was born in South Korea in the early 1960s. I think he now lives in the UK and teaches at Cambridge University.

        Ha ha, those South Koreans used their bribes and kickbacks wisely!

    • Another Ha-Joon Chang fan! 🙂

      I’ve read Kicking Away the Ladder, and skimmed through Bad Samaritans. He really does make very convincing arguments for the importance of intelligent state intervention.

  5. Great article. One take-away, if I am understanding correctly, is the importance of overhauling education system to focus on math and science. I would propose that all children in school should spend most of their schoolday studying mathematics, science theory, and several practical scientific subjects (chemistry, biology, etc.) In addition, every child should learn at least one musical instrument (preferably two) and at least one foreign language. Also art (drawing, painting) and a little bit of literature, but not much. Studying social sciences in school used to be important (geography, etc.), but is not as important any more, because all the information is available on the internet. There is no need to memorize facts (e.g., names of countries and capitals) that are easily available at the click of a mouse. In fact, I would say there is no need for children to memorize anything (not even math formulas), it is much more important to understand how to conduct research, how to think scientifically, and how to apply knowledge to practical applications. Well, there is my modest proposal for education reform. (Applies to any country.)

    • All students should be exposed to dynamical systems theory at the high school level. They need to get a sense of nonlinearity and how reality works. Most people just have linear intuition (ceteris paribus in economics) and don’t understand the complexity of societies and other physical systems.

    • I would say that geography and history are still important though with much less rote memorisation of so-called facts (which in history studies could actually be myths or propaganda). When I studied geography in high school in the late 1970s, I had to learn basic weather phenomena and the terms used, the water cycle, the carbon cycle, world climate and vegetation zones, global wind and ocean patterns, and tropical forest and savanna ecologies(and why tropical forest areas are so poor for agriculture and historically supported low populations) – and this was all in Years 7 and 8. Can’t remember too much of Year 9 and 10 geography but it probably included studying deserts and regions with Mediterranean climates and where and why they occur in the areas the do (usually on the western sides of continents; on the eastern sides are usually sub-tropical to near-temperate zones). In Year 11 geography, among other things, I studied beach environments and went on a school trip that included walking up to the top of a headland jutting into the ocean and watching ocean waves actually curve and converge at the cliff bottom. Had I continued doing geography in Year 12 (I gave it up in favour of economics), I’d have studied the formation of towns and cities, how they develop, what zones there are and what typical activities they engage in.

      When I was working in a public library in the 1990s, I observed high school geography students coming in with projects that called for original research on ecosystems in their local areas. The students usually needed help with finding sources and local government contacts. They already had some idea of how to go about doing original research and presenting it.

      Looking at what I have just said, it’s occurred to me that much climate change denial among the general public can be attributed to ignorance of geography and the issues it raises. Geography can be the subject that links sciences like biology, geology, chemistry and physics at their basic level to economics and history, and you could introduce young people to the study of dynamic non-linear systems here.

      Ignorance of geography can have more expensive and serious consequences, apart from stories about tourists who want to go to Austria but end up in Australia. It was two American writers, Mark Twain and Ambrose Bierce, both living in the late 19th century, who said that war was God’s way of teaching Americans geography. Unfortunately their utterances have been accepted by the US, UK and Australian governments as gospel truth!

      Studying history should involve studying the history of one’s country, maybe the history of the country where your parents and grandparents come from (this could be at community language classes) and the history of neighbouring countries. A big emphasis should be on encouraging students to do original historical research and learning how, let’s say, fascism arises and the social, economic and political conditions in which it appears and thrives. Knowing history can enable students to make rough predictions: if you know the histories and cultures of China, Korea and Japan, and then learn something of Vietnam’s history and culture, you will see commonalities between Vietnam and the others. You can predict that the Vietnamese will also have a strong Confucianist orientation and will value education highly enough to want to invest in it to the extent that the other Asian countries mentioned have done. This may mean that future PISA and TIMM scores for Vietnam will rise even if the country’s economic development stalls or plateaus.

      Where I live (Australia), I believe studying English should include knowing the history of the language’s development, how it relates to other European and Asian languages, logic, how to construct and refute arguments in debate, and how to find and use evidence. Students should also know how propaganda and advertising are used and their strategies and methods.

      Ideally I’d separate Years 7 – 11 into junior high school, make Year 12 and the first two years of undergraduate university study into senior high school, and make attendance at both high schools compulsory. In junior high school, English (or its equivalent in other countries), maths, practical and lab science, one foreign language and its history and culture, geography and history are compulsory subjects. Art, music and sport should be in the curriculum as well with music study including the ability to play one instrument and writing a basic song or composition on music software and uploading it to a blog or website.

      • Alexander Mercouris says:

        Let me speak up for my own subject, which is history. Yes I agree that education should be science focused but some teaching of history and literature is necessary for a well informed and well balanced citizen.

      • Thanks, Jen, you must have gone to a much better school than I did! Okay, you have convinced me that studying geography is important, if done correctly. (In my school, it consisted of memorizing the names of nations and their capitals, something I could now easily lookup on Google maps.)
        Agree that history is important, but you cannot trust schools to teach it correctly if they use standard textbooks (which are ideologically loaded and mostly propaganda). If I were reforming education, I would dispense with history textbooks altogether and just have the kids read monographs on specific topics of interest.
        Agree with you that children should be exposed to the science of linguistics. It is not enough to learn a foreign language, they should also learn at least the basics of structural linguistic theory. (In fact, it is possible for a person to be a structural linguist without even knowing a foreign language — Noam Chomsky is an example — although that is not recommended.)
        As someone who studied linguistics myself at the graduate level, I am continually amazed how few people understand this science. Everybody speaks language, but nobody, unless they studied it academically, seems to have a clue how it actually works. It’s like that character in Moliere who was surprised when he found that that he had been speaking prose.
        For example, I recently had a conversation with my sister, who is a very intelligent woman, somehow the topic of linguistics came up, and she said something like, “Oh, don’t you lingusists study why people in every language use the same word for ‘mama’?”
        “Er, no, that’s not exactly it, Dear Sister. In fact, language-origin myths are frowned upon by serious linguists, as are studies in Onomatopeia… Real linguistics is a branch of semiotics… blah blah blah…”
        She didn’t get it. Well, I don’t understand other peoples professions either, if I never studied them. For example, I do not have a clue what sociologists do!

        • I was lucky to have had two excellent geography teachers at high school and I was interested in the subject so that’s how I remember so much of what I’d been taught.

          I thought Chomsky had studied Hebrew when he was young; his family was originally from Ukraine or some other part of eastern Europe. The home language may have been either Yiddish or Hebrew but I’m not sure.

          It’s criminal that schools don’t teach the English language’s origins and history. People end up with wrong ideas about English: they say rubbish like, “English isn’t a real language because it has no grammar / it’s full of Latin and French words / it changes all the time”. That suggests people are not taught that languages are dynamic and evolving.

          • Jen: One of the best books I have read on the history of the English language is John McWhorter’s “Our Magnificent bastard tongue: The untold history of English.” I highly recommend.
            McWhorter debunks a lot of myths about English, and I also like the fact that he debunks the Sapir-Whorf hypothsis (about language channelling culture). My own ideological bias makes me lean towards linguistics theories that stress the arbitrariness (and randomness) of phonology and morphology as components of a semiotic system. (On the other hand, I am not a Chomskyite, and I concede that human language is not exactly the same as pure code.)

          • “I thought Chomsky had studied Hebrew when he was young”

            That is correct. In fact, his original ambition was to be a Hebrew teacher.

    • I’m actually not so sure of the utility of the sciences. The relevant, ground-breaking stuff needs a ton of theory (and math skillz). Otherwise it ends up about being boiling water and measuring its temperature as it cools, the kind of shit I remember having to do at school. (Well, I usually lazed about during class and made up the results by looking them up on the Internet; why bother doing these experiments when they’ve been done millions of times before?).

      If I had to design a curriculum, I would…

      * Put the main focus on math, for its rigor and endless practical applications, and computer science.
      * De-emphasize the natural sciences; in fact, in the modern world, the old physics-chemistry-biology division is becoming ever less relevant. Abolish it.
      * Emphasize the importance of good diet in PE. Diet is about 70% of physical fitness, but its almost ignored at school (and when it isn’t more often than not resolves around the Food Pyramid, one of the stupidest, most harmful pieces of advice in the world).
      * The second focus on languages. English, of course, but also teaching of Chinese has to be massively expanded.
      * Some knowledge of history, geography, economics, political science, religion and ethics, etc. is useful, but should be taught very carefully, using sources from all over the ideological spectrum.
      * Literature is boring to many people and “critical analysis” is the biggest pile of BS ever. Encouraging the reading of classics should be encouraged but students should never be forced to write about them in the context of fourth generation feminism or whatever.

      • Ha! You are right about literary analysis being B.S. One lit class I took, we read Leskov’s “Леди Макбет Мценского уезда”, and prof made us write 4 separate term papers analyzing the work (each about 10 pages long, so was big project). First paper had to analyze work from POV of structural criticism (structure of sentences and paragraphs, introduction of themes); second paper was to have feminine slant (very obvious, for this work); third paper was to have Marxist slant (how family patriarch oppressed his serfs, etc.); and fourth paper was to have Freudian slant (repressed sexual urges).
        After this pointless exericse, my take-away was that good literature should be just read and not analyzed.
        On the other hand, I believe this class gave me a good radar for detecting bias and propaganda when I am reading something, because I can see how the propagandist is using techniques like foreshadowing, etc.

        • I disagree with the dumping on “literary analysis.” There are good and bad ways to do it. The ideological way is usually the worst. Better ways can be learned by reading writers who were great critics themselves, like Mencken or Orwell.

      • There’s a case for teaching philosophy to primary school age children: studies on children as young as age 6 who learn philosophical concepts show their thinking skills, decision-making skills, creativity and ability to solve mathematical and other problems improve. Also if taught correctly, philosophy encourages children to be both independent, ethical thinkers and co-operative members of a team. These skills are ones people can take with them into high school, university and beyond.

        I agree also that children should learn about nutrition and health. These could be incorporated into basic biology lessons and involve practical projects like growing fruit and vegetables for the school canteen or for school cooking lessons. Along with nutrition and health, children should also learn basic hygiene, cleaning up after themselves (in some countries, students clean classrooms after lessons have finished for the day), basic first aid and how to recognise basic signs of illness in themselves and others (such as coughing, sneezing, headaches, fever) and to seek medical assistance.

        The Food Pyramid should be scrapped: I personally think it’s dangerous especially for people who have gluten tolerance issues. There’s alternative health information on Google now about how wheat and other cereal grains can actually be harmful to physical health and can even have harmful psychological effects.

        At high school level, basic biology concepts should still be taught: students definitely should know about the basic functions of cells, the names of body organs and their functions, and the body’s networks (blood circulation, lymph circulation, nervous system) and photosynthesis in plants. Basic chemistry concepts should be taught too: what are salts, what are metals, what’s in the Table of Elements, what is an acid and what is an alkali, what happens when you mix certain substances together – at least enough chemistry to make people realise they shouldn’t cook crystal meth in closed environments or in the same places they cook food.

        Not sure about what is necessary everyday physics to learn as, like AK, I zoned out whenever physics took over the science lesson.

        • below_freezing says:

          My specialty is in chemical and condensed matter physics. Physics is absolutely necessary for learning about chemical and biological systems and in everyday life. Many people think physics is about string theory and cosmology. In reality the most popular branches of physics is useful things like optics, electronics and materials. 99% of physicists never use relativity, quantum electrodynamics or astrophysicists in their jobs or even learn about them at school. The “hardest” classes I’ve learned were things like Solid State Physics, Statistical Thermodynamics and Machine Shop.

          If you do not know that going twice the speed in a car means 4 times the distance to stop, that may be bad when you slam into a tree. In science, without physics, chemistry is just a list of empirical rules with no justification and no predictive power; no predictive power means no ability to design devices to do useful work. Same with biology. Physics is the central science. Math is useful for describing physics and economics. It is a tool. Physics, finance, etc. are the things built with this tool. You do not need to become an expert in theoretical math to use this tool!

          Everything in this world can be described by the 4 areas of physics and its associated mathematics: Electromagnetism, Mechanics, Quantum Physics, and Statistical Thermodynamics. Not only can they be described, once you know their behavior, you can manipulate them and design devices from them, such as OLED displays.

          Let’s take a cell for example. The molecules interact with each other through only one force and one force alone: electromagnetism. To a great approximation, it’s the exact same electromagnetism that we learn about with magnets and wires. That’s why NMR imaging works; electrons can be approximated as tiny current loops that can flip direction in response to an external field. Salt flows from the inside of the cell outwards, but rarely back in; this is due to statistical thermodynamics and the tendency of entropy to increase (or gradients to decrease). The molecules themselves react governed by quantum mechanics. That is why DNA is damaged when you get struck by UV light; the light promotes electrons to a higher energy level (a quantum idea) which causes molecular instability and bond breaking. Broken bonds are extremely reactive, and while it may reform the old bond its more likely to randomly form bonds to other molecules or even with itself at odd places (statistical thermo again!). And all through this, the cell moves through the bloodstream governed by classical Newton’s laws. What happens in a cell at any time can be described quantitatively with all these laws in principle; because of how complicated a cell is, that is very hard, but the things I listed like salt diffusion, light induced DNA damage, etc. can all be calculated. Once you know this, you can manipulate the cell, and eventually, design something with it or using it.

          That’s how technology advances. That’s why we have NMR, CAT, ultrasound and other medical devices. This is just one field of biology and medicine that people don’t think of as “physics”. There are even more applications in “traditional” fields like optics, sensors and electronics.

          • below_freezing says:


            Electrons behave as tiny current loops due to spin. Specifically, they have spin 1/2. Nuclei also have spin because protons and neutrons also have spin 1/2, with the specific spin depending on proton/neutron number, and it is the up-down spin transition due to RF stimulation in 1H in a space varying magnetic field that give rise to NMR imaging. Hydrogen is used as the target atom because it is the easiest to manipulate due to only having 1 proton and most abundan element in the human body.

            It is possible to measure electronic spin with electron paramagnetic resonance, but that is less useful because most molecules have all paired electrons which give rise to spin 0 overall, and no possible transitions. The exception is with stable radicals, which have unpaired electrons, and are EPR active. Stable organic radicals can be used as “spin probes” and used for specific imaging of targeted tissues with EPR, but it can never replace NMR for whole body scans.

  6. Anatoly,
    I’m afraid you are capturing correlation rather than explanation here. If you want to explain GDP levels or growth (you talk about growth in the title but use levels in the graph), you typically regress growth on the values of explanatory variables measured at the beginning of your sample period. Otherwise, your regression is suffering from what is known as “reverse causation” which is impossible to disentangle.

    In this case, it is true that levels of human capital are positively correlated with GDP levels. There could be two explanations: human capital of kids (measured by PISA) is positively correlated with that of their parents who are actually creating the value added, and that’s why you see the positive relation. Alternatively, you get the education system you could afford, and the level of human capital in hte kids is mostly determined by the efficientcy of the schooling system.

    The two explanations are not mutually exclusive, of course. Still, you just cannot infer causality from your simple graph.

    • Your point is correct. But I think that China suggests that the “GDP => Education” causality is weak. The Chinese are culturally obsessed with education and fundamental science and math teaching does not require a country to be wealthy: teachers at average wage levels and textbooks are all that is needed (there is no problem with building schools in China even in rural areas).

      The state of education in Georgia and Moldova cannot be attributed to GDP levels. The scores should not be lower than for Russia an Ukraine but they are. My impression is that they were not that high during the USSR period so there is a cultural aspect involved.

      • kirill,

        I’m not claiming one of my explanations is more correct than the other, just that the standards of evidence is these types of research are very different. Culture, of course, is another factor that could affect PISA math scores to a significant degree. One also needs to remember that it’s educational expenditures that affects kids’ learning, whether state (good schools and teachers) or private (parents’ investment). Countries differ a lot by the share of educational expenditures in GDP.

        China (or almost any other “Confucian” country) will be a huge outlier in any such regression, though.

    • Agreed (though would mention that in previous posts on this I’ve written loads on the evidence for causation). My argument here, informally, is:

      (1) Economic level depends on human capital level (there is reverse causation too but the former is much stronger).
      (2) Almost all outliers can be explained by one of a few factors, e.g. resource endowment, socialist legacy, being a major tax haven.
      (3) If economic level is below that implied by human capital level, there should be a “potential gap” (as in electricity) between the two that seeks closure; thus, the bigger the gap, the greater the growth that can be expected.

      Establishing (3) formally will need a lot of work, more than an evening definitely. I may do it if I get the idea of writing a paper about it. But informally speaking it tends to hold remarkably consistently. It would explain why in per capita terms China grows so fast (vast potential gap); why Russia and CE Europe in general grows at a reasonable clip (modest potential gap); why its Greece and Italy that are going bankrupt (they’re richer than they “deserve”); why Brazil, Mexico, South Africa, etc. are barely making any progress relative to the developed world (because they’re already where they’re meant to be); and so on.

      • Anatoly,

        my major beef with your set of posts is that your human capital variables are basically contemporaneous with GDP levels. Despite this, you make inference of causality flowing from human capital to GDP, without careful consideration of the reverse flow. That might do on the level of correlation-level story, but never on causation.

        In cross-country growth regression, many funny things could happen. Do you know that distance from equator determines your GDP as well?

  7. How is Turkey part of former socialist bloc?

    • I copied it from the general list into the post-soc list by mistake, and was too lazy to redo the graph when I realized it was on there.

  8. georgesdelatour says:


    Do you think your analysis sheds any light on the Euro crisis? We’re told the southern countries (Greece, Italy etc) are in trouble because of corruption, failure to collect taxes, business-unfriendly practices etc. But maybe, as you suggest, human capital is the key. Finland is doing well, and has excellent PISA scores.

    When the Euro was set up, it would have been politically impossible to reject a country for membership because it had bad PISA scores.

    • Alexander Mercouris says:

      Dear Georges,

      I cannot speak for the rest of southern Europe but the bad condition of the education system in Greece is widely acknowledged and has been under discussion for as long as anyone can remember. To this day any Greek who has genuine ambitions for a good education goes abroad. To what extent this has an immediate bearing on the euro crisis I cannot say but doubtless it bears some responsibility for the economic malaise in Greece, which is longstanding and which the euro crisis has brought to the surface.

      • Aristotle even complain about that.

        but the bad condition of the education system in $country is widely acknowledged and has been under discussion for as long as anyone can remember.

        $country is any member of $world

        ps. I don’t claim (as i have no knowledge about it) that the education system in Greece isn’t bad but you find the discussion that the education system isn’t as good as it should be in every country

    • Georges,

      A timely question, and one that is indirectly covered in the very next post!

      You are correct, I think it does shed light on the crisis. Greece is a bit of an outlier. Ireland was a big outlier in 2007 but the crisis has already fixed that. 😉 Italy and Spain aren’t, though they’re close. Portugal is where it “should be”. But if an “adjustment” to relative standings has to be made it would be logical that they – Greece first and foremost, to a lesser extent Spain and Italy – would be the ones affected. Cyprus is a huge outlier and had to be rescued by Russia.

      The two biggest positive outliers are now the US, Israel, and Argentina. Maybe there are valid explanations for that; maybe they will be in for adjustment shocks (Argentina surely has a history of them, and the US isn’t looking too bright in the long-term…) Japan does considerably less well than can be expected from its human capital, so perhaps it may yet surprise us to the upside…

  9. Referring back to the economics and indicators of Georgia as introduced by Alex, here is an even less complimentary report from about the same period, introduced by the Caucasian Review of International Affairs:

    The author is a former Georgia Economics Minister and an Associate Fellow with the Joint Transatlantic Research and Policy Center (Johns Hopkins University). Among other things, the report claims;

    1. In 2000 the Schevardnadze government began work on a poverty-reduction plan for Georgia. With the help of independent experts and NGO’s the plan was finalized, and Shevardnadze signed it in 2003. It met with international acclaim. The government was overtaken by events which are now well-known, and it was never implemented. Nonetheless, international organizations committed to continuing to work with the Georgian government on the basis of this plan.

    2. The incoming Saaksashvili government decided the program was not needed, and shelved it. The international community continued to work with the government on the basis that the program was in place, resulting in the “absurd situation” that the Georgian government continued to receive international support for a program it refused to recognize and which did not exist. The IMF reported that it had concluded the program that in reality was never put in place, in 2007.

    3. Saakashvili campaigned in 2008 on the slogan, “An Integrated Georgia Without Poverty”. The government initiated a “program” with the same name, which the author describes as “some catch phrases set forth on a few pages” and “a program in name only”. The author further explains that, judging from the text of the “program”, it aimed to realize its poverty-reduction targets through a 50% decrease in the number of social beneficiaries.

    4. The government devised a “50-day Action Plan” which relied, among other projects, on issuing of $500 Million in Eurobonds with a 5-year maturity. This had the immediate effect of increasing the country’s foreign debt by half a Billion dollars. The money was supposed to go to new energy power projects, but a large part of it was instead channeled into the Fund of Future Generations, which was set up for the economic rehabilitation of Abkhazia and South Ossetia after they are reintegrated into Georgia.

    5. In 2006 the government established a National Employment Program (continued in 2007 and early 2008), whereby it essentially ordered selected businesses to give people jobs for 3-month stints. What happened was that some businesses signed documents verifying their compliance while the “employees” simply pocketed the money and never showed up, and some businesses devised a scheme whereby the business would keep half the money in exchange for filing false claims that allowed non-workers to keep the other half. In the end, a handful of people actually got jobs, and tens of millions were wasted.

    6. The post-revolution government implemented a new labour code, which was hailed as one of its greatest achievements. According to the author, it vests all imaginable rights in owners while leaving employees with “literally no rights at all”.

    I’m starting to wonder where Saakashvili got the reputation of being a smarty-smart whiz-kid. According, once again, to the report’s author, his government not only has no clear understanding of the meaning of poverty reduction, it appears “not to have counted” the number of people in the country living below the poverty line.

    What a great leader.

    • Alexander Mercouris says:

      Dear Mark,

      Thank you for this very interesting article on Georgia.

      The more I have read about Georgia the more I have come to the view that the main driver of economic growth since the Rose Revolution has been what by Georgian standards are very large capital transfers from the west. Some of this may be genuine investment but a lot of it looks to me suspiciously like a pay off for the pro western policies that Saakashvili has been following. These include not just Saakashvili’s well know military and foreign policy postures such as his despatch of Georgian troops to places like Iraq and Afghanistan but first and foremost his willingness to make Georgia a transit hub for the various western oil and gas pipeline schemes most of which have however failed to come off and which look increasingly unlikely to do so.

      These capital transfers have enabled Saakashvili to cover Georgia’s trade deficit, to pay and increase salaries and to pay other bills and to indulge in his various whims (eg his project to build a new headquarters for his parliament in Kutaisi). Saakashvili’s ability to pay large salaries to his army, police and civil service is surely the single most important reason for the disappearance of petty corruption during his time in power and for his success in securing their loyalty. However these large capital transfers disguise what seems to be a continuing hollowing out of what remains of Georgia’s industrial base built up during the Soviet period and the descent of Georgian agriculture to what looks alarmingly like subsistence conditions. As is also the case where economic growth depends heavily on heavy capital transfers from abroad, there has also been a sharp increase in inequality as the persons who have the most direct access to these foreign funds benefit disproportionately from them (by the way the same is true of Israel – another country that is the beneficiary of massive capital transfers and where inequality has increased to extraordinary levels).

      This is not to say that there has not been economic growth. Growth driven by capital transfers is still growth. Rather the question is to what extent is it sustainable? I have to say that I get the impression (supported by the two articles each of us has found) that maintaining the level of capital transfers is becoming increasingly difficult especially given that it seems that from 2012 some of the money that has been provided in the form of loans starts to fall due for repayment. I suspect that Obama’s recent meeting with Saakashvili and the frankly bizarre announcement that Georgia is going to form a free trade zone with the US (something which no other European country has done) was really about agreeing for more of the capital transfers to cover the forthcoming shortfall.

      What makes any assessment of what is going on in Georgia difficult is that what Saakashvili and his government say about the situation in Georgia’s economy in my opinion simply cannot be relied on. Pretty much everything Saakashvili said during the 2008 war turned out to be untrue, given which it has always surprised me that there are still so many credulous people in the west who continue to give him the benefit of the doubt for what happened before the war. Given what the two articles you and I have found say I have slowly come to the view that Saakashvili is no more to be trusted on domestic questions than he is on foreign policy ones. I am not saying that everything is smoke and mirrors but I suspect that a lot is and that the day will one day come when this will become clear.

      • @alexander, I think you are correct that Gruzia’s economic “success” is a direct function of American donations. In fact, it was the case for years (don’t know if still is) that Saakashvili and his entire government salaries were paid by grants from Soros. In addition to private grants, American government also pumps millions into that oversized military base. Hey, I could be a great ruler too, if you gave me a little fiefdom to manage and then showered me with cash!

        • Alexander Mercouris says:

          Very true except Yalensis that I cannot imagine you parading around as a despot a la Saakashvili under any circumstances!

          One point I would make is that on the basis of such of his speeches as I have now read I do not think that Saakashvili is the sort of person who will fade quietly into the night if things begin to go wrong in a serious way. Though he is certainly a clever man he gives me the impression of someone who is no longer in control of his own propaganda and rhetoric. He appears to be well on the way to developing a messiah complex and I can easily see this thing ending very badly.

    • Another of Saakashvili’s achievements is a big decline in the tertiary enrollment rate, which is especially bad given that with their atrocious PISA scores Georgian school-leavers really are great need of further study.

      From 36% in 1991, the tertiary enrollment rate remained steady until the late 1990’s, when it began to grow, reaching 43% by 2003 and peaking at 47% in 2005. Then it plummeted to 25% by 2009, edging up to 28% in 2010.

      This seems to have been in substantial part due to an increase in the cost of annual university tuition from 500-600 lari in 2003 to 3000-4000 lari by 2009. Government grants have also plummeted; while they wholly financed 9,700 students in 2003, they were subsidizing only half the tuition costs of 1,000 students by 2009. University access has dropped by more than 80% in some regions.

      But I guess it’s all a matter of priorities. The army and police are now well fed, and the prison population has increased from 182/100k in 2004, to 539/100k in 2011 (so that now it has the dubious distinction of displacing Russia as the European country with the most prisoners per capita).

      • Alexander Mercouris says:

        This is of course consistent with the extreme free market economic policies Saakashvili has adopted. Undoubtedly these accord with his own ideological prejudices but they are of course also the kind of policies that are agreeable to western aid donors and investors. Anyway these education policies are yet another reason to question whether Saakashvili’s model is sustainable.

  10. “Saakashvili’s ability to pay large salaries to his army, police and civil service is surely the single most important reason for the disappearance of petty corruption during his time in power…”

    There used to be a great site for news in Georgia, called the Georgia Media Centre (sometimes the Georgia International Media Centre). It was decidedly oppositionist to Saakashvili, and used to alternate between mocking his crazy promises about millions of tourists and equally crazy boasts that Georgia is so crime-free that people don’t even lock their cars, and hard-hitting pieces about Saakashvili’s courting of Iran while they are U.S. Public Enemy Number One, shouting in frustration, “What, are we the niggers now?” when the political leader of his biggest sugar-daddy is African-American and various other gaffes that suggest on some days his brain and his mouth might as well be in different bodies for all the attention they pay to each other.

    Saakashvili learned a lesson from the raiding and shutdown of Imedi Television in 2007; it was subsequently sold to pro-Saakashvili owners (as reported in a critical piece from the Georgia Media Centre which is no longer accessible), but it drew some sharp criticism. So his approach to the Georgia Media Centre was much smarter and more subtle – instead of simply shutting it down, he turned it into this:

    a puff site full of airheaded stories about celebrities, movie reviews and irrelevancies, and all in Georgian where it was formerly in English. Now it is essentially a blog, and also has a Twitter feed, but you have to be a member. Although it is in Georgian, the articles are still headed with “posted by Admin” in English and the comment directions are still in English, although comments are not permitted. A brilliant stroke; Saakashvili has successfully defanged an enemy while pretending to provide Georgia with a valuable source of entertainment and communication; even international, provided you speak Georgian.

    Anyway, this is a very long and whimsical way of getting to what I wanted to say, which is that there was a story in the old Georgia Media Center (no longer accessible, naturally) which said the surveys done for the Corruption Perceptions Index were done by an agency in Georgia, and that the government chose the businesses to be polled. Businesses which were not in the government’s pocket were simply never asked. Therefore, what appears to be the disappearance of corruption is actually the disappearance of the appearance of corruption, so to speak. It is inconceivable that, with the money pumped into Georgia, the standards of living could remain low for so many, that inflation could continue top be high and that wages could remain so abysmal. Corruption is still there; it’s just behind Saakashvili’s Cloak Of Invisibility.

    “…the day will one day come when this will become clear.”

    Yes, it will, which is why the push to get all the deals in place before it does, and why Saakashvili is working to make Georgia a Parliamentary Republic with most of the power vested in its Prime Minister…which he intends to be.

    • You’re speaking of the CPI. It has improved markedly since 2005 when it was at 2.3, nonetheless I should point out it still remains low at 4.1. But we know that the CPI isn’t worth much…

      I’ve yet to head a valid explanation of the Global Corruption Barometer’s last poll, which found that only 3% of Georgians or their relatives admitted to paying a bribe in the past year. This was far lower than in the rest of the region, AND it was far lower than in previous years in Georgia itself. Did Saakashvili falsify that? Do Georgians have a “special understanding” of corruption that differs from that of Russians or from 2005 Georgians for that matter?

      And it makes intuitive sense, with higher police salaries, plus the removal of so many bureaucratic regulations, it’s not surprising that small-scale bribery has collapsed.

      It seems a bit implausible, so for now I’m going to accept that in terms of petty corruption at least things have become a lot better. (Even if they became a lot worse in many other areas, see my comment above…)

      • Alexander Mercouris says:

        I think there is no doubt that visible or small time corruption has markedly declined or even disappeared under Saakashvili for the reasons we have discussed. Nor is this an achievement to be underestimated. The point about reducing corruption by clearing away petty regulations is a good one and one that Russia should emulate.

        On the subject of visible as opposed to invisible corruption, no state in modern Europe was as corrupt as Nazi Germany. As a recent study has established Hitler at the time of his death was far and away the richest man in Europe (and yes he did have a Swiss bank account). Goering and Himmler were every bit as corrupt as he. In fact the corruption and looting that took place under the Nazi regime was on such a scale that bits and bobs of Nazi loot still turn up in odd places (some paintings from Hitler’s private collection have just been found in a Czech monastery). Moreover this corruption began the moment the Nazis took power with many of the biggest payments to individual Nazi leaders being made in the 1930s by German companies and industrialists. Hitler even had a private foundation, the Adolf Hitler Spende, whose job it was to receive and launder this money.

        The point is that none of this was visible to the German people. Open bribery and corruption were unknown and anybody who travelled to Germany in the 1930s would have seen an outwardly extremely honest and well ordered country.

        • Is that study part of Wages of Destruction? Or is it a paper? I’d be interested to read it.

          I’ve read in a chapter of a certain book, whose title I can’t recall, that the Nazis paid off the key generals and admirals very generously (Doenitz got something like 10x his official salary in 44-45) in return for their loyalty, probably to ward off a military coup. And Goering was of course epically corrupt. I didn’t knew Hitler was personally corrupt however, certainly not to the extent of owning bank accounts and being Europe’s richest person.

          • Alexander Mercouris says:

            No it is not part of Wages of Destruction. The study about Hitler’s personal wealth is Hitler’s Fortune by Chris Whetton.

            You are absolutely right that the Nazis made substantial payments to particular German generals. As I remember the subject is not discussed in Whetton’s study.

          • Moscow Exile says:

            Hitler’s considerable wealth was founded on the royalties he earned from Mein Kampf, which was first published in 1924.

            I should say there were very few households in the Third Reich without a copy of Mein Kampf: it was given out as an award to Hitlerjugend and students; all party members, of course, possessed a copy of it; and every pair of newlyweds was given a copy. Six million copies of Mein Kampf had already been issued to newlyweds by l942 and by the time of Hitler’s death, eight million copies of Mein Kampf had been sold. Hitler was fond of boasting that Mein Kampf had the largest sales of any book worldwide, apart from the Bible. His royalties were $1m a year.

            The royalties from Mein Kampf were administered by Hitler’s business manager, Max Amann, a director of his publisher, the Franz Eher Verlag in Munich – one of the richest and most influential publishing houses in Nazi Germany.

            Not long before his death in his Berlin bunker in 1945, Hitler wrote a will in which he left most of his possessions and estate to the Nazi Party. The Nazi Party was abolished after the capitulation of the Reich, as was the Franz Eher Verlag, and Hitler’s remaining assets and estate were transferred to the state Bavaria, where Hitler had been officially registered as a resident.

            The Bavarian finance ministry still holds the copyright of Mein Kampf and has banned publication of the book in German-speaking territories. The state of Bavaria has also sought, with limited success, to restrict its publication elsewhere.

            Under German law, however, that copyright expires on the 70th anniversary of the author’s death – 30 April 2015.

            An interesting footnote to this tale of Hitler’s royalties from Mein Kampf is what happened in the USA. During WWII, the US government made more than $20,000 from royalties on Mein Kampf, having seized the copyright as part of the Trading with the Enemy Act. (Hitler’s book was one of the first assets gained under this law.) By l979, the Justice Department had collected more than $139,000 in Mein Kampf royalties. Eventually, the monies were paid on a pro-rata basis to claimants, many of them American ex-POWs.

            His immense royalties on Mein Kampf notwithstanding, Hitler lived a frugal existence – in luxury. His Berchtesgaden country residence in the Bavarian Alps was built according to his own plans and was a millionaire’s pad by anyone’s standards and he was chauffeured around Germany in flash Mercs or in the luxurious custom made Führers train, which for some reason or other was called “Amerika”.

            • Alexander Mercouris says:

              Dear Moscow Exile,

              It is a while since I read the book but though royalties from Mein Kampf were an important part of Hitler’s wealth as I remember the greater part was made accounted for by payments from industrialists and businessmen into the Adolf Hitler Spende. There was also of course considerable tax evasion.

              Hitler’s frugality is a myth. You have touched on some aspects of his lifestyle: his Mercedes cars and the Obersalzburg residency the sheer size and opulence of which few appreciate. He also had a valet and numerous servants dressed in well tailored and flamboyant military or party uniforms, the latter having been designed by none other than the actual Hugo Boss, who designed all the Nazi party’s uniforms. Hitler also rebuilt the Reichchancellery in Berlin, where he lived when he was not at the Obersalsburg or at his military headquarters, in a most magnificent way making it a palace by any standard. He also amassed a massive art collection and had made for himself a luxurious train in which he travelled when he did not travel by air.

              The best visual impressions of how Hitler actually lived are in the various Soviet films made in the first thirty years after the war especially the Fall of Berlin 1949 and Ozerov’s Liberation series 1966 to 1971, which whatever else may be said of them made a particular effort to reproduce the interior scenes with accuracy. These films and Seventeen Moments in Spring 1972 also give better impressions of the interior of the bunker than do western films. These (including Downfall) make it look much more drab and squalid than it really was. Though the ceilings were low the bunker had parquet floors and brightly plastered and whitewashed walls and was kept extremely clean whilst it was furnished with expensive furniture and paintings brought down from the Reichschancellery.

  11. Excellent article.

    Once again, keep up the good work.

    You know your articles remind me the reason why USA is so afraid of China now and is doing and has done viturlly any thing to stop China, because they know what will happen if the average Chinese’s wealth status converge to that of South Korea or Japan.