Peace = Prosperity.

Peace = Prosperity.

by Natalie Pace.

Q&A with Dr. Gary Becker, esteemed University of Chicago economist and Nobel Laureate, on how freedom, democracy, war, terrorism, riots and gangs affect a nation's prosperity.



Peace Activists John Lennon and Yoko Ono in Greenwich, CT 1973. Photo Reprinted byPermission of: Bob Gruen. BobGruen.com.

When perusing the 2007 Index of Economic Freedom, there is one thing that strikes you. There is very little correlation between how "free" a county is and what it's Gross Domestic Product growth will look like. China and India, ranked 119th and 104th out of 157 countries, and evaluated as "mostly unfree," have some of the highest GDP growth rates in the world, at 10.1% and 8.1% respectively, in 2004. Meanwhile, "free" countries, like the United Kingdom (#6) and Australia (#3) have moderate growth, at 3.1% and 3.6% GDP growth rates in 2004. The real GDP growth rate of the U.S. in 2007 is predicted to be 2.9% (source: U.S. Treasury Dept.)


According to renowned economist and Nobel Laureate Dr. Gary Becker, who spoke at the 2007 Milken Global Conference in April, there is almost zero correlation between political systems and GDP growth rate. China and India are not exceptional; there are many other examples of countries that grew very rapidly under non-democratic political systems or military regimes. For instance, Chile grew rapidly under Pinochet. South Korea and Taiwan grew rapidly under military regimes.


While there is no measurable correlation between political systems and growth rates, according to Dr. Becker, there is significant causation between prosperity and democracy. Dr. Becker says, "Look at the examples I mentioned, Chile, South Korea and Taiwan. All of these counties grew rapidly under non-democratic regimes and converted to thriving democracies. When countries grow significantly, there are strong pressures within the country to move to a more democratic regime."

As a modern example of that continued trend, Dr. Becker noted that China has made important moves in the direction of freedom. The Chinese people today are free to say and do things that they would never have been able to say or do 15 years ago. Dr. Becker predicts that China will continue to experience growth, as well as the evolution toward a more free and open economy.

And indeed, China has made strong moves recently to open up its banking to foreign investment. Citigroup announced on May 10, 2007, that Citigroup China would roll-out two new investment products -- Structured Investment Accounts -- for the Chinese consumer that would allow him/her to invest in equities or currencies, with a principal protection feature. Just a few years ago, all banks in China were state-owned enterprises.

China owns half a trillion dollars of investments in U.S. T-Bills -- $479 billion -- but the government is also developing an appetite for U.S. equity (source: Treasury Department). On May 21, 2007, it was announced that the Chinese government is buying a $3 billion non-voting, minority stake in the Blackstone Group, a private equity group. Lou Jiwei, head of the working group of the State Investment Company, said "We are very pleased to be able to make the State Investment Company's first investment in such a well-respected firm as Blackstone." (Blackstone just bought Equity Office Properties and has filed plans to go public in an Initial Public Offering with the Securities and Exchange Commission.)

Editor's Note: For more insight into "China's Evolution Toward Freedom," including how and why it is occurring, read Natalie Pace's Q&A with Dr. Charles Zhang, Chairman and CEO, Sohu.com. Dr. Zhang is one of the most respected Chairman/CEOs in mainland China, as well as in the U.S. You can read the article in the archived NataliePace.com ezine, vol. 4, issue 1.

Another phenomenon worth looking into is the relationship between peace and prosperity. South Korea, Taiwan and Japan are historic examples of economies that soared after a period of war, a trend that seems to be repeating today in the former war-torn regions of Bosnia, Croatia and Albania. According to the 2007 Index of Economic Freedom, Eastern Europe is also experiencing some of the strongest economic growth rates in the world today. (By the way: Notice how closely correlated the tax rate is with GDP growth rates.)

Country GDP Growth Rate in 2004 Freedom Ranking Tax Rate

Albania 5.9% Moderately free. #66 20%

The Czech Republic 4.7% Mostly free. #31 24%-32%

Estonia 7.8% Mostly Free. #12 23%

Slovenia 4.2% Mostly free. #58 25-50%

Peace and Prosperity
Do the seeds of prosperity thrive in the aftermath of war? If prosperity seeds the ground for democracy, what fertilizes the soil for prosperity? Is it peace? What is the cost of violence on society? Why does a country like Albania experience great growth in the aftermath of war, whereas an area like South Central Los Angeles is still largely neglected by big business, 15 years after the 1992 Los Angeles riots?

How worried should we be about the threat of terrorism? Will the labor uprisings in Macao threaten the continued growth of that Chinese municipality and those companies, like Las Vegas Sands and Wynn, which have major investments in the island? How does an investor evaluate the ability of a former war-torn region (like Croatia) or a region hit by natural disaster (like New Orleans or Sri Lanka) to prosper once peace, security and rebuilding are initiated?

On Tuesday, April 24, 2007, I sat down with Dr. Gary Becker to discuss the relationship between prosperity and peace, riots, terrorism, natural disaster and more. Dr. Becker won his Nobel Laureate for expanding the study of economics to new areas of human behavior and relations. Throughout his esteemed career, Dr. Becker has immersed himself in the academics of prosperity - what conditions make countries and companies more conducive to productivity and growth. As you can see from his comments on democracy and economic growth, the findings are not always what you might think!



Natalie Pace: I'm interested in examining the relationship of peace to prosperity, Dr. Becker. The incredible growth that we've seen in the former war-torn region of Eastern Europe seems to indicate that peace seeds the ground for prosperity. Is there empirical evidence that countries thrive in peace?

Dr. Gary Becker: We've known that for over 150 years. The history of both natural and man-made disasters over the last century-and-a-half generally supports John Stewart Mill's observation of the "great rapidity with which countries recover from a state of devastation, the disappearance in a short time, of all traces of mischief done by earthquakes, floods, hurricanes and the ravages of war."

Is terrorism in a different category? War, hurricanes, earthquakes -they have a definitive end, whereas terrorism has become an ongoing threat.

Terrorism creates fear. After an attack on a bus, the response to terrorism is far greater than any reasonable response would dictate. People respond by not wanting to travel by bus, even if the likelihood that they'll be attacked is low. The less frequent the rider or the lower the education of the potential rider, the more likely s/he will respond by not wanting to travel.

Common sense tells you that it is hard to sell oranges in a marketplace that is under attack. Is there a risk quotient attached to investments in regions of conflict, like Israel or the Middle East?

Countries that are more vulnerable to violence have less opportunity for good business because property isn't safe.

What is the estimated cost of the Iraq War?

The estimated cost of the war in Iraq is $600-$800 billion so far and cumulative into the future, when you consider the ammunition, soldiers' lives, veteran's services, recruitment costs, etc.

No wonder Peter Orszag, Director, Congressional Budget Office, said that "the U.S. government is becoming a health insurance firm with a side business in defense." Why do some countries and neighborhoods recover more quickly after war and riots? Civic leaders in South Central Los Angeles are still complaining that the neighborhood was never rehabilitated after the 1992 Los Angeles Riots, and progress in Afghanistan has been slow.

Drugs destroy a lot of neighborhoods. Neighborhoods with a history of violence make it very hard for peaceful business to thrive. After a riot, it is very hard to recover.

Why is it so hard to attract business into gang areas?

You can just go live and do business in another less violent neighborhood.

Is that similar to what we are seeing now in the migration from Western to Eastern Europe? There are riots occurring in France, which has a GDP growth rate of 2.1%, and companies are relocating to Eastern Europe, where some countries are growing at three times that of France. Young people are willing to work harder for less pay in Estonia, which is experiencing 7.8% growth rate.

The principle is the same. With the formation of the European Union, you can move across the borders.

In our global economy, would your research suggest that the brightest and most motivated individuals will leave the violent war-torn regions, and seek work in the more peaceful, free community with the most developed property rights and stability?

Yes.

So -- bottom line -- peace is good for business, right?

When war ends, there is a very rapid recovery. As long as people retain the knowledge and skills they had before the war, there are good business opportunities directly after a war.




Dr. Becker is the University Professor, Department of Economics, and Sociology Professor, Graduate School of Business, The University of Chicago. To keep track of Dr. Becker's continuing research and commentary, visit his website and blog. To hear more of his recommendations for strengthening the U.S. economy, listen to his panels from the 2008 Milken Global Economic Conference. To read more of his insights on how communities can transform to prosperity out of violence and/or disaster, read The Economics of Disaster Management in the June NataliePace.com ezine.