Sunday, November 4, 2012

The Effect of Politics and Social Capital in the Guatemalan Economy

In The White Man’s Burden, William Easterly challenges the usefulness of Western Aid. He suggests that while billions of dollars have been given to developing countries with the best intentions, these substantial gifts have done little to increase growth rates in foreign countries. Notably, Easterly argues that even market-based rearrangements do not guarantee, and perhaps may even hinder economic development. To support this point, Easterly cites the structural adjustment loans made by the World Bank and IMF in the 80s and 90s. Such loans were expected to jumpstart emerging economies and lead to their convergence with Western levels of prosperity. Easterly criticizes this “shock therapy” model of development; he argues, “The free market depends on the bottom-up emergence of complex institutions and social norms that are difficult for outsiders to understand, much less change… People everywhere have to explore the piecemeal, experimental steps how to move towards free markets” (61). Easterly claims that top-down approaches are ultimately unsuccessful because they do provide enough time for cultural norms to adopt this new way of thinking.
            Easterly’s commentary on the futility of free market laws without sufficient social capital seems especially relevant to emerging countries such as Guatemala. Figure 1 shows GDP growth in Guatemala since the 1960s.

After the Guatemalan government signed the peace accords in 1996, GDP growth was anticipated to take-off. While GDP has been consistent, it has held constant since the early 90s and is on average lower than it was in the 60s at the beginning of the 36-year civil war. When a “bad” government held power(under the infamous oppressor Rios Mont), GDP growth fell dramatically, reaching -3.83% in 1982. However, the switch to a more open democratic system does not seem to have the converse positive effect. A possible reason for this is that social capital in Guatemala remains very low. Consider the following “social capital” indicators: 80% of managers consider both crime and corruption to be major business threats and 71% do not have faith in the court’s ability in property rights litigation. Secondly, violent crime and delinquency challenge stability; “Guatemala's homicide rate in 2010 was about 41 per 100,000 persons. For comparison, the U.S. rate was about 5.4 per 100,000 persons for the same period” ( From small transactions such as doubting the sanitary preparation of foods to deciding whether to invest in business infrastructure, the lack of faith in those outside one’s social circle may act as a dead weight to productivity despite the new democratic political institutions.

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