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Monday, 28 July 2014

The knots of development

Ethical economy: The knots of development

Why are so many poor countries stuck with huge economic problems? Why, for example, are there so many unemployed young people in Egypt – 41 percent of 19-24 year-olds? The poor state of British housing can help answer these questions. 

By developing world standards, the British housing system works quite well. In Egypt, it takes 77 bureaucratic procedures in 31 offices, and between six and 14 years, to get legal approval for construction of a new house, according to the 2012 doctoral dissertation of Abdel Hamid El Kafrawy of the University of Glasgow. The result: housing is in chronically short supply and 65 percent of the population live in unregistered and untaxed buildings. 

For a rich country, though, the UK does remarkably badly. Construction has been inadequate, at half the modest target rate set by the government in 2007. The relatively few new houses and apartments which are built are mostly relatively small – new American houses have almost three times as much floor space and new French houses have 45 percent more, according to a 2009 study by the British Commission for Architecture and the Built Environment. And rental and mortgage payments for these under-sized living quarters take a higher share of income in the UK than almost other developed country. 

There is no simple explanation of what’s wrong. Rather, many strands are knotted up into one big mess. The list of problems include: a government-mandated decline in the supply of inexpensive “social” housing; the common belief of most politicians and current and would-be homeowners that house prices should always rise faster than national income; a property tax system which reflects that ultimately self-destructive desire; irresponsible lending practices; asphyxiating planning rules; high land prices which encourage builders to think small; and a shortage of skilled craftsmen. 

A strong dictatorship could try to resolve all these issues with a series of decrees: ordering more construction, allocating housing, importing craftsmen, setting rents and so forth. However, no government could manage to do all that well, even if it did not have to worry about dissatisfied citizens.  In a democracy, where such worries are paramount, substantial changes are all but impossible. While almost everyone in Britain agrees that more, larger and cheaper houses are desirable in principle, homeowners do not want the value of their own properties to fall and few people welcome new construction in their neighbourhoods. 

British housing is not the only example of a knotty problem in a highly developed economy. U.S. medical care is expensive and the results are not particularly impressive. Spanish unemployment rates are far too high. Tax codes everywhere are unnecessarily complex. In every case, the causes are complicated and cures seem to be beyond reach. A near universal desire to improve the system cannot overcome the resistance to each potential change – and many strands have to be untwisted for any substantial improvement. 

Developing countries are poorer than rich countries because they have many more of these knotty problems, and their problems are typically even harder to untie, thanks to a mixture of corruption, ignorance and incompetence. For example, Egyptian youth suffer from, among other things, a poorly designed educational system, job-stifling established companies, indifferent banks, a government which distorts the job market by paying inflated wages for unproductive workers and political uncertainty that holds back hiring. As in rich countries, no one likes the current situation as a whole, but the current arrangements are so entrenched that a year after a political revolution the employment knot looks as tight as ever. 

Such knots can be untied, as every industrial success story demonstrates. Unfortunately, there seems to be no single sure technique. Objective analysis can lead to helpful changes, but a series of sensible reports on the British housing market have been ignored. Popular pressure sometimes does the trick, but the desire to woo voters has only tightened the UK housing knot. Political revolutions and defeats in war can dissolve obstructive economic and social relationships, but such traumas do not always untie old knots, as in Egypt, and sometimes create new ones. 

The crucial factor, in my opinion, is ethical. Change only comes when enough people are persuaded that the common good served by new arrangements is more valuable than the individual interests protected by the current system. My favourite example is the reduction of pollution in rich countries. A new social consensus that pollution was a serious evil led to a vast number of large and small changes, including new laws, corporate responsibilities and regulatory attitudes. Almost everyone was willing to make sacrifices, from lost profit and dividends to less effective detergents. 

A similar common commitment to practical virtue is needed to improve British housing and reduce Egyptian unemployment. Until it arrives, I fear these knots will remain painfully tight.

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