DRI-248 for week of 10-19-14: The Economic Inoculation Against Terrorism

An Access Advertising EconBrief:

The Economic Inoculation Against Terrorism

Last week’s EconBrief analyzed the military adventures undertaken by Great Britain and the United States over the last two centuries and found uncanny and unsettling similarities. In particular, we detected a growing tendency to intervene militarily to settle disputes coupled with a growing distaste for war per se. Given the lack of close substitutes for complete victory in military conflict, this is a disastrous combination.

Both Great Britain and the United States found increasing need to use military force but were increasingly reluctant to apply maximum force with promptness and dispatch. The British dithered when confronted by Islamic fanaticism in the Sudan and ended up suffering the loss of a national hero, vast prestige and the need to intervene finally anyway. The British then faced one revolt after another in southern Africa, Ireland, India and Palestine. In each case, they reacted in measured ways only to be excoriated when finally forced to take stronger action. Ultimately, they abandoned their empire rather than take the actions necessary to preserve it.

Compare the actions taken by Great Britain in India against the passive resistance led by Gandhi with those that would have been taken by, say, a totalitarian nation like Nazi Germany, Soviet Russia or Communist China. The British were repeatedly forced to back down from using force against Gandhi – not by superior force or numbers wielded by the Mahatma but by their own moral qualms about exerting the force necessary to prevail. By contrast, Gandhi would never have gained any public notice, let alone worldwide acclaim, had he lived and operated under the Third Reich. Hitler’s minions would have murdered him long before he rose to public prominence. In Soviet Russia, Gandhi would have earned a bullet in the back of his head and unmarked burial in a mass grave. In Red China, Gandhi would either have undergone re-education or joined the faceless millions on the funeral pyre in tribute to revolutionary communism.

Lawrence in Arabia: Visionary or Myopic Mystic?

Director David Lean’s magnificent film Lawrence of Arabia acquainted the world with the story of British Col. T.E. Lawrence, an obscure officer who seized the opportunity to unite disparate and warring Arab tribes in guerilla warfare against the Germans in the Ottoman Empire during World War I. Playwright Robert Bolt’s screenplay depicts the Arabs as simple, childlike victims of wily colonial exploiters. Lawrence is a martyr who seeks to restore Arabs to their former historical glory by casting out the foreign devils from Arabia – “Arabia for the Arabs.”

Lawrence is continually frustrated in his campaign to organize the Arabs into an effective and cohesive fighting force. Tribal and religious divisions separate Arabs from each other almost as much as from the Turks.  Why can’t they view themselves as Arabs, he wonders, rather than as members of particular tribes or sects?

When Lawrence succeeds in whipping his guerilla force into fighting shape, he turns them into a virtual column of the British army and becomes instrumental in winning the war in the Middle East. He assumes that, once united in war, the Arabs will remain so in peacetime. They will stand fast against the British and French colonialists and reclaim their heritage. When this hope proves illusory, he retreats home to England in disillusion.

The perspective of economics allows us the insight that Lawrence was doomed to disappointment from the start. In wartime, people of all races, creeds and nationalities are able and willing to put aside personal priorities in favor of the mutual overriding priority of winning the war. At war’s end, however, there is no longer any single overriding priority strong enough to claim universal allegiance. Now each pursues his or her own interest. Of course, this pursuit of individual interest can still produce broadly beneficial results. Indeed, it should do just that – provided the disciplining forces of free markets and competition are given free play. But in post-World War I Arabia, the ideas of Adam Smith and free markets were as alien as Dixieland jazz. Economically, Arabia was primitive and aboriginal. Its tribes were dedicated to warfare and plunder – just as the aboriginal peoples of Australia, New Guinea, North America, South America and Africa were before modern civilization caught up with them. There was a tradition of trade or exchange in aboriginal culture – but no tradition of freedom, free markets and property rights.

The Flame that Ignited the Arab Spring

Of course, Arab society did not stall out completely at the aboriginal stage of primitive, nomadic desert life. Arabs were naturally blessed with copious quantities of petroleum, the vital economic resource of the 20th century. Though mostly unable to develop this resource themselves, they did play host to companies from Western industrialized nations that created infrastructure for that purpose. The resulting cultural interaction paved the way for modernization and a measure of secularization. Thus, from a distance the major cities of the Middle East might be hard to distinguish from those of the West. Up close, though, the differences are stark.

The noted South American economist and political advisor Hernando De Soto led a joint research study into the origins of the Arab Spring of 2011. He recounted his experiences in the recent Wall Street Journal op-ed, “The Capitalist Cure for Terrorism” (Saturday-Sunday, October 11-12, 2014). The seminal event of this movement was the self-immolation of a 26-year-old Tunisian man named Mohamed Bouazizi. Judging from Western coverage of the Middle East, one would expect him to have been unemployed, disaffected and despairing of his plight. As De Soto and his team discovered, the truth was far different.

Bouazizi was not unemployed. He was a street merchant, one of the most common occupational categories in the Arab world. He began trading at age 12, graduating to the responsible position of bookkeeper at the local market by the time he was 19. At the time of his death, he was “selling fruits and vegetables from different carts and sites;” i.e., he was a multi-product, multiple-location entrepreneur. It seems clear that he was not driven to extremity by idleness and despair. So what drove him to public suicide?

Like most of his trade, Bouazizi operated illegally. His dream was to obtain the capital to expand his business into the legal economy. He wanted to buy a pickup truck for delivering his vegetables to retail outlets. He longed to form a legal company as an umbrella under which to operate – stake clear title to assets, establish collateral, get a loan for the truck.

This dream seems modest to America ears. But for Bouazizi it was unattainable. “Government inspectors made Bouazizi’s life miserable, shaking him down for bribes when he couldn’t produce [business] licenses that were (by design) virtually unobtainable. He tired of the abuse. The day he killed himself, inspectors had come to seize his merchandise and his electronic scale for weighing goods. A tussle began. One municipal inspector, a woman, slapped Bouazizi across the face. That humiliation, along with the confiscation of just $225 worth of his wares, is said to have led the young man to take his own life.”

“Tunisia’s system of cronyism, which demanded payoffs for official protection at every turn, had withdrawn its support from Bouazizi and ruined him. He could no longer generate profits or repay the loans he had taken to buy the confiscated merchandise. He was bankrupt, and the truck that he dreamed of purchasing was now also out of reach. He couldn’t sell and relocate because he had no legal title to his business to pass on. So he died in flames – wearing Western-style sneakers, jeans, a T-shirt and a zippered jacket, demanding the right to work in a legal market economy.”

Asked if Bouazizi had left a legacy, his brother replied, “Of course. He believed the poor had a right to buy and sell.”

Mohamed Bouazizi was not alone. In the next two months, at least 63 people in Tunisia, Algeria, Morocco, Yemen, Saudi Arabia and Egypt set themselves afire in imitation of and sympathy with Bouazizi. Some of them survived to tell stories similar to his. Their battle cry was “we are all Mohamed Bouazizi.” It became the rallying cry of the Arab Spring, bringing down no fewer than four political regimes.

The Western news media have been heretofore silent about the true origins of the Arab Spring. It did not originate in “pleas for political or religious rights or for higher wage subsidies.” None of the “dying statements [of the 63] referred to religion or politics.” Instead, the survivors spoke of “economic exclusion,” a la Bouazizi. “Their great objective was ‘ras el mel‘ (Arabic for ‘capital’), and their despair and indignation sprang from the arbitrary expropriation of what little capital they had.”

Das Kapital or Capital?

Nobody speaks with greater force on this subject than Hernando De Soto. He is the Latin American Adam Smith, the South American champion of free markets and property rights. He is now the world’s leading property-rights theorist, having ascended upon the deaths of Ronald Coase and Armen Alchian. And he put his own ideas into successful practice in his home country of Peru by leading the world’s only successful counter-terrorist movement in the 1980s.

The Shining Path was a Marxist band of terrorist revolutionaries who tried to overthrow the Peruvian government in the 1980s. They were led by a onetime university professor named Abimael Guzman. Guzman posed as the champion of Peru’s poor farmers and farm workers. He organized Peru’s Communist Party around the idea of massive farming communes and used the Shining Path as the recruiting arm for these communes. Some 30,000 resistors were murdered. Officials were kidnapped and held for ransom. This strategy gave Shining Path control of the Peruvian countryside by 1990.

De Soto was the government advisor charged with combatting Shining Path. He didn’t forswear the use of military force, but his first move was toward the library and the computer rather than the armory. “What changed the debate, and ultimately the government’s response, was proof that the poor in Peru weren’t unemployed or underemployed laborers or farmers, as the conventional wisdom held at the time. Instead, most of them were small entrepreneurs, operating off the books in Peru’s ‘informal economy.’ They accounted for 62% of Peru’s population and generated 34% of its gross domestic product – and they had accumulated some $70 billion worth of real-estate assets [emphasis added].

This new learning completely confuted the stylized portrayal of poverty depicted by Guzman and his Shining Path ideologues. It enabled De Soto and his colleagues to do something that is apparently beyond the capabilities of Western governments – eliminate three-quarters of the regulations and red tape blocking the path of entrepreneurs and workers, allow ordinary citizens to file complaints and legal actions against government and provide formal recognition of the property rights of those citizens. An estimated 380,000 businesses and 500,000 jobs came out of the shadows of the informal economy and into the sunlight of the legal, taxed economy. One result of this was an extra $8 billion of government revenue, which rewarded government for its recognition of the private sector.

Having put the property rights of the poor on a firm footing, De Soto could now set about eradicating Shining Path, confident that once it won the guerilla war it would not lose the peace that followed. In true free-market fashion, Peru reworked its army into an all-volunteer force that was four times its previous size. They rapidly defeated the guerillas.

In this connection, it is instructive to compare the effect of military intervention in Peru with that undertaken elsewhere. The military interventions undertaken by the U.S. and earlier by Great Britain served to recruit volunteers for terrorist groups by creating the specter of a foreign invader imposing an alien ideology on the poor. In Peru, volunteers flocked to an anti-terrorist cause that was empowering them rather than threatening them, enriching them and their neighbors rather than bombing them.

Peru stands out because the economic medicine was actually given. Other links between poverty, terrorism and lack of property rights can be cited. In the 1950s and 60s, Indonesia was home to Communist and terrorist movements. It was also a land that consistently thwarted its entrepreneurs, many of whom were immigrant Chinese, in ways reminiscent of an Arab state. The southern half of Africa has long been known for stifling entrepreneurship through bureaucratic controls and monopoly, often combined with nepotism and corruption. This began as a colonial inheritance and has passed down to the line of despots that has ruled Africa since the advent of independence.

All We Are Saying Is Give Economics a Chance

The American public is repeatedly sold the proposition that the world is dangerous and becoming more so with each passing day. Alas, the kind of military interventions practiced by the U.S. have not lessened the danger in the past and have, in fact, increased it. The only tried-and-true, time-tested solution to the problems posed by terrorism is economic, not military. We refer retrospectively to World War II as “the good war” because our cause seems so unimpeachably just when juxtaposed alongside the evils of Fascism and the Holocaust. But it is not moral afflatus and good intentions that justify war. It is the postwar economic miracles worked in German and Japan that set an invisible seal on our rosy memories of World War II. By contrast, for example, the defeat of Germany in World War I now seems Pyrrhic because the war and subsequent draconian peace terms produced Germany’s interwar economic upheaval and resulting lurch into Fascism.

The evil of war lies in the rarity of its success, not the oft-cited barbarity of its practice. The U.S. went to war in Korea, Vietnam, Kuwait, Iran and Afghanistan to counter real evils. We enjoyed considerable military success and achieved some of our goals. But we did not achieve victory. Last week’s EconBrief reminds us how overwhelmingly difficult it was even for Great Britain and the U.S. – each far and away the foremost military power of its day – to achieve their ends through war. Only in South Korea was long-term success attained, and there it was due to economic victory rather than military victory.

Careful study of world poverty and terrorism will uncover an economic phenomenon, against which military measures are largely unavailing and police tactics are merely a stopgap.

“They” Can’t Adapt to Free Markets and Institutions

One entrenched obstacle to adopting Hernando De Soto’s game plan against terrorism is the conventional thinking that certain cultures are inherently unable to absorb the principles of economics and free markets. This argument is so vaguely made that it is never clear whether proponents are arguing the genetic or cultural inferiority of the affected peoples. Recently it has been applied to former Soviet Russia when attempts to acclimate the Russian people to free markets failed. The interesting thing about this episode is that it began with the proposition that Western economic consultants could design market institutions and then superimpose them on the Russian people. In other words, elite analysts began by assuming that Russians could easily adapt to whatever economic system was designed by others for their benefit, but then took the polar opposite position that Russians were incapable of adapting to free markets. No provision was made for the possibility that – having lived for centuries under rigid autocracy – Russians might need time to adapt to free institutions.

For centuries, Chinese were considered inferior and suitable only for low-skilled labor. That is the task to which most immigrant Chinese were consigned in 19th-century America. While Chinese in China failed to achieve economic development throughout most of the 20th century, immigrant Chinese were the world’s great ethnic economic development success story. Eventually Taiwan and mainland China joined the ranks of the developed world and another development myth bit the dust.

When the short-term results of the Arab Spring dislocations disappointed many in the West, Arabs became the latest people accorded the dishonor of being deemed unable to accommodate freedom and free markets. Perhaps the most concise response to this line of thought was given indirectly by Arab leaders responding to De Soto’s charge that their countries lacked the legal infrastructure to bring the poor into the formal economy. “You don’t need to tell us this,” one replied. “We’ve always been for entrepreneurs. Your prophet chased the merchants from the temple. Our prophet was a merchant!” In other words, the Arab tradition accommodates trade, even if their legal system is hostile to it.

Once again, this space stresses the distinction between the Rule of Law – which abhors privilege and worships freedom – and mere adherence to statutory law – which often cements tyranny into place.

Bringing Free Markets and Property Rights to the Middle East

As far as Western elites and the Western news media are concerned, the only kind of Middle East economic reform worth mentioning is foreign aid. But over a half-century of government-to-government foreign aid has proven to be an unqualified disaster. Economists like William Easterly and the late Lord Peter Bauer have written copiously on the pretentions of Western development economists and the corruption of Western development agencies. This is the deadest of dead ends.

De Soto’s approach is the only institutional approach worth considering. Apparently, it is actually receiving consideration by the beneficiaries of the Arab Spring. Egypt’s President, Abdel Fattah Al Sisi, commissioned De Soto and his team to study Egypt’s informal economy. That study found that Egypt’s poor get as much income from capital, in the informal economy, as they do from salaries in the formal economy. More precisely, some 24 million salaried citizens earn about $21 billion per year in salaries while owning some $360 billion in unrecognized assets that throw off roughly an equivalent amount of yearly income. As De Soto recognizes, this income is approximately 100 times the total of all Western financial, military and development aid to Egypt. It is also “eight times more than the value of all foreign direct investment in Egypt since Napoleon invaded more than 200 years ago.”

The problem is that much of this value is locked up in bureaucratic limbo. “It can take years to do something as simple as validating a title in real estate.”

 This is the real secret to achieving economic development in the Middle East. It is also the secret to fighting terrorism and preserving American security.

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