Here’s Monday’s piece from Martin, posted originally at Prudent Bear.  A dose of cold realism for Mr Wolfowitz and the World Bank.

The World Bank gave the developing world an unexpected Christmas present Wednesday, when it unveiled its annual “Global Economic Prospects” report, looked out to 2030 and projected a higher developing country growth rate than in 1980-2005 and a huge emerging Third World middle class.  Since it’s the job of the Bear’s Lair to deflate unwarranted optimism, the report represents a challenge that must be addressed.

The World Bank stated its expectation that GDP per capita in the developing world would grow 3.1% per annum as against 2.1% in 1980-2005. Its central argument is that the rapidly emerging global middle class, 1.2 billion strong in 2030, three times its 2005 size, with family incomes between $18,000 and $60,000, will realize their true interest and vote for World Bank-friendly policies such as open trade barriers and globalist foreign policies.

Even were they to do such a thing, it’s doubtful what effect they could have, since they would still be far outnumbered by the 6.8 billion impoverished souls who gain little from globalization and who would have to depend on benign “pro-poor policies” voted by the emerging middle class for the meager handouts that made their miserable existence possible.

The World Bank’s vision of a planet of highly educated if still somewhat impoverished yuppies, impeccably schooled in the arcana of development economics, voting in all the World Bank’s favorite nostrums together with a dash of government spending to help the less privileged is simply fanciful.  Indian software engineers may well vote and consume more or less as the World Bank would want them to, but there is no conceivable future in which we are blessed with 1.2 billion Indian software engineers. There will be nowhere near 1.2 billion highly educated and economically literate people in the world by 2030. All we can claim is that there might be 1.2 billion people with some kind of middle class spending power.

Like the new middle classes of the last century, the new middle classes’ first purchase on attaining solvency (beyond the environmentally harmless cell-phone, of which there are already 1.7 billion in use) will be some kind of automobile. These will clog up traffic arteries, require huge amounts of infrastructure spending and drive oil prices to three times or even ten times their current level in real terms. If the World Bank’s growth projections are realized, China will buy 30 million automobiles a year in 2030, double the United States’ current purchases. India too is setting up domestic manufacturing and producing automobiles selling in the $2,500-$3,000 range, thus increasing the polluting power of the emerging middle class dollar.

A world middle class three times is current size produces three times the traffic, three times the global warming and three times the deaths on the roads. The only advantage to the rest of us is the additional income to the 6.8 billion non-middle-class from running body-shops dealing with all the fender-benders.

It’s becoming increasingly clear that a development strategy focused on the emerging middle class, globalization, higher education and the major urban centers is doomed to failure.  Latin America should have taught us this.  Contrary to popular legend, that continent has had a middle class, industrialization, globally famous cities such as Buenos Aires and Rio de Janeiro and a standard of living well above the poorest for over a century, yet it has progressed very little economically and has seen its wealth disparities widen to an inordinate extent.  Latin American development economists in the 1950s and 1960s focused primarily on developing indigenous industries and breaking the chains that tied people to the land; anyone who has been to Sao Paulo recently knows that such a focus was misguided.

Recent experience in Thailand has demonstrated what’s wrong with the World Bank’s development theories.  After the financial crisis of 1997-98, Thai governments were exceptionally World Bank-friendly; they devalued the exchange rate and focused the economy primarily on exports.  The result was an economy that produced a quick rebound from the crisis, followed by glittering prosperity in an ever-enlarging Bangkok and some holiday resorts and simmering resentment in the countryside.  Outside Bangkok, this strategy was highly unpopular.

Prime Minister Thaksin Shinawatra, elected in 2001, focused on the need for balanced development, focusing on the domestic economy and devising programs to help rural villages and small businesses develop capabilities that could raise their living standards along with those of city-dwellers. The result was that, in spite of his triumphant re-election in a relatively clean poll last March, Thaksin was forced from office in a military coup organized by the Bangkok elite and the urban mob. Needless to say, being basically leftist this coup was applauded by all the people who retrospectively find the late lamented President Augusto Pinochet, the only economically successful Latin American leader in the last 50 years, the worst of monsters. 

Urban-centered development may produce a middle class, international integration and the applause of World Bank bureaucrats. However, it also widens the gap between those who are connected to the international economy and those outside the major cities who are not. If perpetuated, as in Latin America, it freezes society into underdevelopment.

The World Bank dismisses this, by postulating airily a world in which Western agriculture has been reduced to “boutique niches” so that Third World farmers can prosper by taking over the agricultural commodities that the West abandons.  But that isn’t going to happen, at least not on the relatively short timeframe before 2030 (after all the EU Common Agricultural Policy is officially untouchable before 2014) so something else is required.

Since the World Bank’s favored policies have no adequate constituency of support, and if enacted would cause widening gaps between rich and poor and cause their support to erode altogether, we are likely to see a world in which they are only rarely adopted. Thus, if rapid growth depended on the implementation of World Bank policies, we could be quite sure that it wouldn’t happen.

China, on the other hand, has made many mistakes in its breakneck rise to world economic power, but it got a couple of big things right.  First, it developed agriculture before reforming industry. This took the sting out of the worst rural poverty before the yuppies began to get rich, thus reducing the problems of inequality that rapid urban development produces. Second, it adopted a draconian one child social policy in the 1970s, which stopped China’s rapid population growth in its tracks. Even rural development is pointless if population is increasing by 2-3% per annum; land is subdivided and re-divided to the extent that capital is never built up, and so modern agricultural techniques are never applied. The society has to do all the running it can to stay in the same place, and as Africa has demonstrated, it generally doesn’t quite succeed in doing so.

At this stage, China has a huge problem of bad debts, primarily incurred by state owned companies and irresponsible municipalities, which may yet cause the financial system to collapse, lose the savings of the Chinese people in a orgy of bankruptcy, and cause the economy as a whole to regress.  But it’s obvious what caused those bad debts to arise: the system of state owned enterprise and the distorted ideology of Maoist Communism.

On balance China’s successes are much more striking than its failures. It is thus the Chinese model, not the World Bank model, that we should be scurrying to adopt, whether in the rapidly developing economy of Vietnam, the rapidly growing but still shaky economy of India, the economically self-destructive polities of Latin America or the apparently hopeless (but in reality not so hopeless) cases of Africa.

Wise development policy is thus clear. If a country has a 2-3% population growth, like most of Africa and much of Latin America, it needs to institute a one-child policy immediately, by whatever means available. Only thus can it prevent the problem of population growth eating at agricultural resources and perpetuating poverty. Poor African countries should also try to persuade the World Bank or Bill Gates to institute a solid system of old age pensions for their citizens over 70, to reduce the incentive to procreate for retirement security. Without a one-child policy, only the luckiest or most under-populated countries will be able to achieve economic growth.

Having reduced the principal constraint on emergence from poverty (which itself will have huge and benign long term worldwide environmental and resource effects) the next step is to focus development policies on encouraging agriculture and rural businesses, concentrating education resources on the primary and secondary sectors in the most poorly served areas, and shifting urban colleges as far as possible into the private sector.  For a poor country, a prestige college is like an airline, an impossibly expensive money pit, the benefits of which accrue almost entirely to the rich and to foreigners. Open the economy by all means – the educated urban classes will benefit from this – but do not in any way subsidize their education, their economic activity, or their tickets to whichever Western country happens to be seeking skilled immigrants that year.

Countries that follow this prescription will find their growth balanced, albeit possibly at a somewhat lower initial rate than would be produced by an urban-focused “dash for growth,” but with a tendency towards steady acceleration rather then relapse. Young people will not be driven off the land by overpopulation, so will not join drug gangs, start guerilla wars, or become illegal immigrants elsewhere, wasting their human resources. The income distribution will remain moderate. Cities will not be overdeveloped. Resources will not be wasted on real estate bubbles or flashy cars. Emigration will be limited.

Even Africa can succeed in this way; these policies of rural and small business-focused development and population restriction are precisely the opposite of those which Africa has followed to such miserable effect since independence.

In the long run, if these policies were widely adopted, per capita economic growth would even surpass the rate the World Bank expects. Resource usage, job losses in the West and environmental degradation would be much lower, because of the lower population track the world had adopted.

Since the World Bank hasn’t and won’t push these policy proposals in the Third World, and Third World governments, dominated by their urban elites, won’t adopt them, the growth it projects won’t happen. Its report is accordingly nothing more than smiley-face waste paper.

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005).  Details can be found on the web-site Great Conservatives.