In which I read David Brat's dissertation so you don't have to

By a series of improbable near-coincidences, I happened to be looking at the dissertation of David Brat today, on the day after he defeated Eric Cantor in the Republican primary. Under the circumstances, I wrote a review of the dissertation, which is being featured by Washington Center for Equitable Growth.

In defeating House majority leader Eric Cantor in his Republican Party primary, Tea Party-identified David Brat has surprised the political world—including Eric Cantor, whose pollsters assured him he had a comfortable lead. (It has also done some damage to the no-doubt partly-true thesis that the difference between the Tea Party insurgents and the “mainstream” Republican Party had narrowed to the point of insignificance.) Brat defeated Cantor in spite of having only a fraction of Cantor’s power, a fraction of his spending, and a fraction of his allies. Journalists and poltiicos have since been scrambling to learn more about Brat’s thinking. Because Brat is a professor of economics and business at Randolph-Macon College, he has left a large paper trail. Many Tea Party-aligned works—such as W. Cleon Skousen’s The 5,000 Year Leap, a dreadful “history” of the United States as a Christian nation—have been offensive to professional standards. Does Brat’s work fit into that category? It does not.

There is, unsurprisingly, no question that Brat is a conservative. He is to the right of Cantor on most issues. He ran against Cantor’s “corruption,” something that seems consonant with a 2011 essay titled “God and Advanced Mammon—Can Theological Types Handle Usury and Capitalism?” There, he warns of both conservative and liberal hypocrisy and calls for a church that coexists with modern capitalism. (He also writes that he has “the sinking feeling” that someone like Hitler could rise again.[1])  

Brat also administers a $500,000 grant from Branch Banking & Trust Company to teach the “moral foundations of capitalism” at Randolph-Macon, a program that teaches the “free market” principles of Ayn Rand. Brat says that he himself is not a “Randian,” though he says he has been influenced by her works and her perspective.[2] (Rand, of course, was an atheist who thought that belief in God was irrational. One reasonable hypothesis would be that Brat shares Rand’s views of capitalism, but doesn’t accept the anti-religious elements of her worldview.) In an interview in 2010, Brat asserted that “[t]he latest in economic research shows that ethical ideas may matter just as much as traditional economic variables in generating long-run economic growth.”[3]

His works make clear that the intersection of religion and capitalism has long been a matter of interest and concern. And though the published work mentioned above shows no signs of meeting high academic standards, he did earn a Ph.D. in economics in 1996 from American University. His dissertation was called “Human Capital, Religion, and Economic Growth,” and situates itself in the large debate about why some countries are rich and some are poor. Like many dissertations in economics, it is split into three semi-related chapters, at least some of which were later published as journal articles. 

What ties the dissertation chapters together is an interest in the stock of total social knowledge within nations. Brat believes that this aggregate “research and development” capital does a great deal to explain the differences between rich and poor nations: the more, obviously, the better. 

The first chapter of his dissertation is concerned with “[Research & Development] Spillovers and International Convergence,” and focuses on R&D “spillovers” from those that do the research to those that don’t, and finds that these spillovers contribute to the convergence between rich and poor economies. It also argues that the effect of research and development capital is stronger than the effect of human capital, defined in a limited way as investments in secondary education. The second chapter of the dissertation, “Inequality among Nations,” examines changes in inequality between 1960 and 1988. He finds that global inequality worsened over that period, and attributes the differences to R&D investment. In the absence of “spillover” that he explored in Chapter 1, he argues, inequality would be even worse. 

But why, he asks at the end of the chapter, are human capital inputs such as scientists so unevenly distributed throughout the world? It’s a question that he addresses in the third chapter of dissertation, which, by appearances within the text and also given his subsequent career, seems like the most personal. (It also takes up about half of the pages of the dissertation.) In chapter 3, “Science and Religion in the 19th Century,” Brat contributes to a debate in historical sociology that stretches back to Max Weber about the role of religion in economic growth. (Weber, though briefly discussed, is shockingly not cited in the dissertation.) 

Like Weber, Brat believes that Protestantism shapes other social institutions in a way that leads to economic growth. For Brat, however, it is not so much that Protestantism inculcates personal thrift and hard-work, but, more importantly, that it is most compatible with the rise of science. Brat’s hero of economic growth is not the Calvinist farmer or shopkeeper, but the Protestant scientist. 

The chapter examines the rise of scientific education in (Protestant) Germany and England and contrasts it with Catholic France. The basic findings are that Protestantism stimulates scientific production by influencing educational institutions, the organization of the state, and philosophical modes of thinking among scientists. Yet in making the case, Brat is forced to confront the weakness of his own evidence. He catalogues a variety of mild effects attributed to Protestantism on education and the state—and, in particular, in limiting the state in England and allotting a large share of R&D to private industry. (My own view, in my capacity as an historian, is that “Protestantism” is probably not even the right category of analysis for what he is trying to accomplish.) 

Nevertheless, his examination of France leads him to conclude that “Protestantism is not a necessary condition for the advancement of science.” State support, such as existed in France, is sufficient in the short-run, he concludes, but only Protestant-derived states provide the right kind of government structure to provide stability over time, as well as the decentralized environment that can produced good science and research. There is, it must be said, much that is dubious and little if anything that is original in this chapter. Everything is based on the work of other historians and economists; there is no real additional contribution. There is a huge amount of hand-waving in the chain of causation from Protestantism leading to constitutional republics leading to educational institutions leading to good environments for research and development leading to economic growth. It is certainly not the dishonest hack-work of a Skousen, but neither is it scholarship worth much consideration. The conclusion that Protestantism was indeed important for economic growth, though the effect was not large compared to other factors, does show some degree of intellectual restraint. 

But although the pieces are not connected in the dissertation, it is troubling to place the three chapters together. First, because challenging questions for a self-identified “free-marketer,” such as why the state has been so central to the research and development that he believes drives economic growth, are totally unexamined. But more importantly, the question posed at the end of chapter two, about why some countries lack of research and development capital, is given an implied (but not explicit) answer in the third chapter: they have the wrong religion. 

It is easy to see the basis of his interest in the relationship between religious values and ethics and economic growth, even in a nearly twenty-year-old dissertation. But his thinking shows no sign of having grown more complex in the intervening years, and the interview he gave in 2010—in which he states that “ethical ideas may matter just as much as traditional economic variables in generating long-run economic growth” suggests that the modesty of some of the dissertation’s claims has fallen away. 

It has left him, perhaps, with the kind of immodesty and conviction that led him to believe that he could challenge an incumbent Majority Leader—and win.

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[1] Reid J. Epstein, “David Brat’s Writings: Hitler’s Rise ‘Could All Happen Again’,” http://blogs.wsj.com/washwire/2014/06/11/david-brats-writings-hitlers-rise-could-all-happen-again/

[2] Eric Lach, “Dave Brat Runs a $500,000 Program to Push Ayn Rand’s Ideas at College,” http://talkingpointsmemo.com/muckraker/dave-brat-bbt-moral-foundations-of-capitalism

[3] David S. Joachim, “A Long Shot so Long, the Tea Party Took a Pass,” http://www.nytimes.com/2014/06/12/us/politics/david-brat-waged-solo-fight-against-eric-cantor.html?module=Search&mabReward=relbias%3Ar 

Filling the Empty Box?: Equitable Growth and Latin America Today

This post is part two of a two-part essay on equitable growth in Latin America. For part one, click here. The combined piece has been featured by the Washington Center for Equitable Growth.

In spite of the many obstacles, there have been signs of hope in Latin America for equitable growth in the last decade. The region’s economy has grown at about 4% annually over the last ten years, and, in several high profile cases, also managed to reduce measured inequality. So is Fajnzylber’s box still empty? His original table was calculated in a rather crude way. High growth was considered anything over a 2.4% annual increase in GDP, the developed world average over the previous two decades at the time of his writing. His measurement of inequality was based on the ratio of the income share of the poorest 40% of the population to the richest 10%—a calculation that did not account for relative increases or decreases in inequality. At the time, the developed world average was 0.8 – that is, the lower 40% had combined income equal to 80% of the richest 10%. Fajnzylber’s standard for Latin American inequality was, arbitrarily, half of that measure: a ratio of 0.4. His results in 1990 were as follows:

Fajnzylber’s original “empty box” table, 1990

	High growth	Low growth
High equity		Argentina, Uruguay
Low equity	Brazil, Colombia, Ecuador, Mexico, Paraguay, Panama, Dominican Republic	Bolivia, Chile, Peru, Venezuela, Haiti, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua

Using data from the World Bank, I recreated Fajnzylber’s table, using the most current statistics available and the same criteria that he established. Given the reputation that the Latin American economies have had over the last few years, the results are perhaps surprising:

Updating Fajnzylber’s table, with current data

	High growth	Low growth
High equity
Low equity	Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, Venezuela	El Salvador

Every country with available data in the region has grown by more than a 2.4% annual rate over the last decade with the exception of El Salvador. But there are no countries that meet Fajnzylber’s standard for relative equality left in Latin America. Indeed, to re-run his numbers is to confront a world changed by inequality, for there are few countries in the world left that meet the standard he established twenty-five years ago. His developed world average had been a ratio of 0.8; now the world’s best performers on that metric are the Scandinavian countries and a few places in Eastern Europe, hovering around 0.6. Canada and France today barely meet his lowered-expectations standard for Latin America in 1990, at 0.4. The United States has a ratio of 0.23, and the Latin American countries are terrible performers: Uruguay and Nicaragua are the only countries over 0.2; Mexico’s ratio is 0.184, Argentina’s is 0.156, Venezuela’s is 0.152, Chile’s is 0.140 and many are below 0.1, including Brazil at 0.093, Guatemala at 0.089, and Bolivia at 0.046.

Plainly, by using an absolute standard of inequality rather than one that measures the rate of change, this data does not register the progress that some Latin American countries have made in reducing equality over the last decade. To address this, I’ve produced a modified table, using the same growth standard but looking at change in the countries’ Gini indexes over time. Most Latin American countries had a local maximum in their Gini index between 1998 and 2002, and almost all have reached a local minimum in the last year or two. If we take a significant decline in inequality to be a peak to trough reduction in Gini index of 4 points over those ten years, this is the table that results.[1]

A rate-of-change accounting of growth and inequality fills the empty box

	High growth	Low growth
Significant decline in inequality (>4 points)	Argentina, Bolivia, Brazil, Colombia, Dominican Republic, Ecuador, Honduras, Mexico, Panama, Peru	El Salvador
Small decline in inequality	Chile, Costa Rica, Uruguay

The story embedded in the data is clear: working from an extremely poor starting point, the experience of most of Latin America has been one of strong and equitable growth over the last decade. The principal reasons that this has been possible are clear enough. Rapid growth in Asia has kept commodity prices high, and Latin America, though now also the producer of many types of sophisticated manufactured goods, remains a major exporter of raw and semi-finished goods. At the same time, most of the region has been ruled by left and center-left governments that have made improving the lives of the poor among their highest priorities. This has taken many forms. Venezuela’s has been the most polarizing: both nationally and internationally, judgments on the effectiveness of the social missions and the economic management of Venezuela’s government allow for little middle ground. In the last decade or so, the poverty rate has been cut in half, from more than 60% of the population to around 30%. But excessive oil dependence, shortages of basic goods, increasing violence, and the recent imposition of price controls suggest that, at best, Venezuela’s economy could have been managed much better than it has been, and, at worst, may be following a classic pattern of populist spending that may be lead to future adjustment that will come at a high cost, both politically and economically.[2]

            Most of the region, however, has used more conventional macroeconomic management, and, somewhat in the manner that President Obama did with the health care industry, compromised with powerful economic interests in the pursuit of broader goals. Brazil’s ascent, under its charming president Lula da Silva and his successor Dilma Roussef, has been so spectacular that the old joke that “Brazil is the country of the future, and always will be,” no longer seems to hold. But other countries have had even more impressive statistical progress. Ecuador has knocked more than ten points off its Gini index, while Panama has grown at more than 8% annually over the last decade.

            How then should progress be maintained and extended? There are already some signs of trouble. In Brazil, for example, once-rapid growth has slowed to a trickle; Mexico, frequently championed as one of the world’s great emerging economies, is on the verge of outright recession. And though much of the region has been governed by the left in the last decade, significant redistribution remains rare. There are signature anti-poverty programs, like Oportunidades in Mexico and Bolsa Família in Brazil, that give conditional cash grants in exchange for behaviors like children’s school attendance. But these progressive policies are mixed in with a huge amount of regressive government spending. The budget for Oportunidades in Mexico, for example, is dwarfed by the cost of regressive energy subsidies.[3] Tax collection as a percentage of GDP has increased modestly, but remains meager. As a result, major Latin American economies do almost nothing to reduce their levels of measured inequality through taxes and transfers. European countries knock 19 points off their Gini indexes through taxation and redistribution; Latin America only 2 points. Pre- and post-tax Gini indexes are virtually identical for the region’s major economies.[4]

The hopeful reading of that situation is that there are huge benefits to be gained from relatively straightforward welfare-enhancing programs and the elimination of regressive subsidies, and there is ample room for both growth and the reduction in poverty to follow. The pessimistic reading of the situation is that the last ten years have been among the most propitious in Latin American history for equitable growth, and much more probably should have been delivered. It remains to be seen whether the political systems of societies that remain grossly unequal will be able to make further progress in the decades to come.

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[1] In a few cases, there is insufficient data to make a clear determination. Guatemala’s most recent year is 2006; Venezuela peaked in 2005 and troughed in 2006 and lacks subsequent data. The CIA Gini index, which is considered less reliable than the World Bank’s, now has Venezuela’s Gini as the lowest of measurable Latin American countries, so it would probably belong in the high growth, significant decline box as well.

[2] See Rudiger Dornbusch and Sebastian Edwards, eds., The Macroeconomics of Populism in Latin America (Chicago: University of Chicago Press, 1991).

[3] John Scott Andretta, “¿Quién se beneficia de los subsidies energéticos en México?” in Carlos Elizondo Mayer-Serra and Ana Laura Magaloni Kerpel (eds.), Uso y abuso de los recursos públicos, Mexico, CIDE, 2012.

[4] The data is from 2008. The chart comes from the OECD report, “Latin American Economic Outlook 2012,” http://www.oecd-ilibrary.org/development/latin-american-economic-outlook-2012_leo-2011-en

What should the United States learn from the lack of equitable growth in Latin America?

This post is part one of a two-part essay on equitable growth in Latin America. For part two, click here. The combined piece has been featured by the Washington Center for Equitable Growth.

When the improbably-named Fernando Fajnzylber published the unappealingly-titled Unavoidable Industrial Restructuring in Latin America in 1990, it hardly had the makings of a classic. But Fajnzylber had identified a problem so fundamental to the region’s economies that it became exactly that. At the beginning of the book, he made a two-by-two grid, labeling the rows by high and low equity and the columns by high and low growth. Looking at the period from 1965 to 1984, Fajnzylber found Latin American countries that had managed high growth, countries that had high equity, and some that had neither. But one box was conspicuously empty: the one showing simultaneous high equity and high growth.[1] Fajnzylber’s work helped make filling his “empty box”—getting to growth with equity—a policy goal of most economists and governments in the region ever since.

            To be sure, the period from 1965 to 1984 that Fajnzylber analyzed was not just any time in the history of Latin America. A wave of military dictatorships had taken power in the major economies of South America. They blamed high inflation and economic turmoil on the left and sometimes on powerful unions. To combat those problems they turned to the recipes of the Chicago school: “shock therapy” that involved ending price and wage controls, privatizing state-owned businesses, and reducing tariffs to very low levels. Terror ensured that people could not effectively organize to protest their lost wages. After initial economic contraction, some countries experienced strong growth. The fact that this growth was coupled with major reductions in real purchasing power for workers and hence with widening inequality was not the sign of a process gone wrong: it was the intended policy outcome. Debt crises in the 1980s led to a lost decade for growth and further “neoliberal” reforms, as state monopolies were sold off—mostly to be replaced by private near-monopolies that created enormous fortunes for those connected to the state (for example, Mexico’s Carlos Slim, who eventually became the world’s richest man).

            Of course, inequality—Latin America’s original economic sin, more so than poverty itself—was hardly new to the region. Class divisions run deep throughout Latin American economies.[2] It would be a mistake to attribute this to immutable and ahistorical national characteristics, but it is a very old phenomenon. The region’s colonial economy was driven primarily by the wealth extracted by mining precious metals and by plantation agriculture. The basic situation for European colonists—after the reduction in the indigenous population due to disease and, later, campaigns of removal—was that land was cheap but labor was scarce, and the best way to resolve that problem was through a variety of forms of coerced labor, in particular the enslavement of Africans and the indigenous people who remained. The resulting gaps between those with political and economic power and those without were enormous.

            The reforms that liberal and positivist elites enacted in the early nineteenth century, after independence was achieved in the most of the region, did little to ease inequality. Liberals believed in free trade and individual landholding: they tried to distribute lands held in common to individual proprietors and reduce the power of the Catholic Church, which had operated as the region’s largest landowner, bank, educator, and welfare institution. Though they succeeded in the latter goal over the course of the century, the states they headed lacked the capacity to replace the church’s functions, and in some ways, they actually exacerbated inequality. Recent work by Moramay López Alonso, for example, on the second half of the nineteenth century in Mexico, shows that even in a period of economic growth and modernization, living standards (as indicated by heights) declined for the majority of the population.[3] In other words, growth without equity is nothing new to Latin America.

            In the twentieth century, Latin America has been practically synonymous with the problem of underdevelopment. There are rival theories about its cause. To reduce things to their most basic, two frameworks have been dominant. The first was the “dependency” school, which placed responsibility for Latin America’s underdevelopment on its disadvantageous dependence on the advanced economies of Europe and the United States. The basic problem, it was thought, was of Latin America’s insertion into an imperialistic world-system. Some dependency theorists sought solutions in moderate reforms, such as introducing protections for domestic industries. These were sometimes successful, and sometimes led to the creation of uncompetitive businesses that couldn’t survive in the absence of state support. More radical interpretations of dependency also emerged, counseling armed socialist uprising and economic autarky. After its revolution of 1959, Cuba tried a version of this. Inequality fell from the levels of Brazil to levels of Sweden in a few short years, and some forms of extreme poverty were eradicated. But, facing an economic embargo from the United States, it had to rely on the Soviet Union, and its measure of “dependence” increased. To say nothing of the absence of fundamental political freedoms, economic management has careened from one unstable plan to another, and what was once one of Latin America’s richest countries has consistently lost ground.

            Over time, the grounds for belief in strong forms of dependency theory looked increasingly flimsy, and historians began to offer explanations based on a growth-economics tradition.[4] The decline in the terms of trade between raw materials and finished goods that had inspired the original dependency analysis proved cyclical, not secular. Close analysis showed that Latin American economies were not helpless participants in the international economy, but able to influence important commodity prices. And socialist revolution proved either unattainable or economically disastrous. Historians and analysts increasingly explained Latin America’s economic conditions as problems of “institutions” that needed reform, not only its position in the world economy.

            From the point of view of generally left-wing dependency theory, this “institutional” analysis sometimes has the appearance of victim blaming and political conservatism. But it needn’t be understood in those terms. Kenneth Sokoloff and Stanley Engerman, for example, have argued that Latin America’s institutions are precisely the result of colonial inequalities and the largely successful struggle of outnumbered elites to maintain their privileges. Their data shows, for example, a clear inverse relationship between extant inequality and the years that voting rights are extended to cover most of the population.[5] Frightened elites do not invest in, and indeed actively suppress, dangerous forms of human capital formation among the common people. The persistence of inequality is, according to this model, the expected result of elites acting to maintain their privileges over decades and even centuries. That explanation takes a view of things from a very great height, and leaves the details to be worked out elsewhere. But it sounds a powerful warning to the United States as levels of inequality there approach those traditionally associated with the other Americas. If Latin America has a lesson for the United States today, it is that maintaining a relatively egalitarian society is not only important for growth, it is also important for keeping politics balanced within boundaries that can support a healthy and responsive democracy.

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[1] Fernando Fajnzylber, Unavoidable Industrial Restructuring in Latin America (Durham, N.C.: Duke University Press, 1990), 2. Fajnzylber’s standard for high growth was an average annual growth rate over 2.4%, the industrial world’s average. His measure of equity was the take ratio of the lowest 40% to the highest 10% of 0.4, half that of the developed world average in the late 1970s/early 1980s.

[2] As Branko Milanovic has put it, inequality in Asia is based on location—some countries are much richer than others—while inequality in Latin America is based on class. Branko Milanovic, The Haves and the Have-nots: A Brief and Idiosyncratic History of Global Inequality (New York: Basic Books, 2011), 185.

[3] Moramay López-Alonso, Measuring Up: A History of Living Standards in Mexico, 1850-1950 (Stanford: Stanford University Press, 2012).

[4] For a introduction to this debate, see especially Stephen Haber, ed., How Latin America Fell Behind: Essays on the Economic Histories of Brazil and Mexico, 1800-1914 (Stanford: Stanford University Press, 1997).

[5] Kenneth Sokoloff and Stanley Engerman, “Institutions, Factor Endowments, and Paths of Development in the New World,” Journal of Economic Perspectives 14, no. 3 (Summer 2000): 226.