The Becker-Posner Blog

How to Greatly Reduce the Fiscal Burden of Entitlements-Becker

During the past couple of years, the financial crisis induced the US, Europe, Japan, and many other countries to greatly increase their fiscal deficits and government debt. Unlike the UK and Germany, and a few other countries, The Obama administration has done little to attack the fiscal deficit that has grown much larger since his election as president. The absence of action on the deficit front has been reported to be an important reason why Peter Orszag recently announced his resignation of Director of the Office of Management and Budget.

Yet despite the seriousness of the rapid increase in government spending and fiscal deficits during the crisis, the main budgetary issue facing all developed countries during the next couple of decades is the expected growth in spending on entitlements: mainly, spending on retirement incomes, and medical care given to the elderly. The growth in these expenditures is partly due to growing life expectancy and relatively low birth rates that will raise the number of retirees collecting social security benefits while reducing the relative number of men and women who are working to pay for these benefits. The growth in medical entitlements is mainly the result of technological advances and other changes that has led to a sharp expansion in both private and public spending on medical care during the past several decades, an expansion that is expected to continue into the future.

Orszag, when head of the Congressional Budget Office (CBO) in August 2008, predicted that unless radical actions are taken, the cost of Medicare, Medicaid, and social security will rise from 18 percent of GDP in 2008 to 28 percent by the middle of this century, and perhaps to 35 percent soon thereafter. Of course, such estimates depend on many guesses, such as the future rates of growth of GDP, how life expectancy will change, and how many expensive advances will occur in medical care. Still, these estimates are consistent with those made by others, and clearly indicate that health and retirement entitlements will become a growing American fiscal problem unless important steps are taken to scale them back. Similar concerns apply to the UK, Germany, Japan, and other rich countries.

I have supported changing retirement systems from pay-as-you-go to individual account defined contribution systems, as in American IRA and Sep private retirement accounts. I also support sharply increasing the fraction of all medical care spending on the elderly that comes from out of pocket spending by patients (see my post on March 28). Another reform could also greatly reduce future public spending on retirement incomes and health benefits, and make an important contribution to closing the long run fiscal deficit.

This reform involves a big increase in the average age of retirement before individuals become eligible to qualify for either social security or old age public healthcare benefits. When the American social security system was established in 1935, the expected retirement age was 65. At that time, the average life expectancy for 65 year olds was a mere 12 years. Therefore, years in retirement amounted on average to about one quarter of the 47 years that men typically worked in the 1920s (before the Great Depression) prior to reaching age 65. Expected life expectancy of men aged 65 now averages about 18 years, and it is a few years longer for women.  Men who retire at age 65 have typically worked on the average about 45 years, so retirement years for these men is about 40% of working years. Actual retirement of many men and women actually occurs at age 62, despite the decline in physically demanding work, and the improvements in health.

I propose that the US and other countries greatly raise over time the retirement age before the average person became eligible for either social security retirement income or publicly-funded health benefits. One simple and attractive rule would be to raise retirement age by an amount that makes the ratio of years spent in retirement to years spent working equal to the ratio that existed at the beginning of the social security system. Suppose the average person starts working at age 20, and lives a further 18 years if they make it to age 65. Then the average number of years spent in retirement for these persons would equal about one quarter of their average working years, the ratio prior to the introduction of American social security, if average retirement ages were raised to age 69 or 70.

If the average retirement age were raised to near 70 to qualify for retirement and elderly health benefits, retirees would still have more absolute years of retirement than they did 90 years ago. Moreover, their retirement years would be better because they would be healthier, both physically and mentally. As at present, men and women in poor health would be able to retire earlier through the disability system.

The US has been slowly increasing the normal retirement age in stages first from age 65 to 66, and then to age 67 for everyone born after 1960. These have been steps in the right direction, but they do not go far enough and have been too slow. It is time to raise more rapidly the normal retirement age for persons in reasonably good health to age 70 before they become eligible for either social security or Medicare benefits. This would add three years to taxable earnings, and eventually reduce the number of elderly collecting social security benefits by almost 20 % compared to what it would be under present retirement ages. It would also significantly reduce spending on Medicare, although by less than 20% since persons over age 75 take the bulk of this spending because they are in worse health than younger retirees.

Maintaining the ratio of working to retirement years is a reasonable first approximation to a guideline for determining the eligible age for retirement and health benefits. As the health and life expectancy of the elderly continues to improve in the future-as they surely will- retirement ages should be raised beyond age 70.

 

 

 

 

The Entitlements Quandary—Posner

As Becker explains, advances in medical technology (which are very costly) and (related to those advances) increases in longevity, create the prospect of very great increases in social security and Medicare outlays in future years. The prospect is increasingly worrisome because of the large annual federal deficits that the nation has been running and the resulting increase in the national debt. Although rapid economic growth would (as Becker has emphasized in previous posts) make the debt manageable, we may very well be facing a longish period of below-average economic growth as a result of persistent high unemployment, economic uncertainty, and anti-growth public policies such as encouraging unionism.

 

Becker sets forth a program for reining in the growth of entitlement expenditures. The question I wish to address is the political realism of that or alternative programs for limiting such growth.

 

It is extremely difficult to marshal political support to deal at present with future problems. Future problems by definition are not felt in the present, and so it is difficult to mobilize public opinion in support of solutions unless they are costless. And politicians have a short time horizon, which means that they will not benefit politically from measures that impose present costs but yield benefits to the voting public after the politician has left office.

 

If, however, the costs can be deferred to the future as well, the current public may not object to a measure that confers benefits only in the future. That was the approach of the 1983 social security reform, which raised the age of full entitlement to social security benefits from 65 to 67 gradually for persons born in or after 1938—and they were only 45 when the reform was enacted. And only persons born in 1960 or later would have to wait until they were 67 to be entitled to full benefits; they were only 23 in 1983. Both the costs (in reduced entitlements) and the benefits (in reduced entitlements expense) were pushed into the relatively distant future. The discounted present effects were thus slight, and so the reform was relatively uncontroversial.

 

The problem with repeating such a measure now is that we probably can’t afford to defer entitlements reform for 30 or 40 years. Suppose Congress increased the age of full entitlement to social security benefits to 70 for persons who are 23 years old today. The reform would not take take full effect until they reached 67, which would be 44 years from now, although there would be some savings earlier if, as with the 1983 reform, a gradual rise in the retirement age began for persons who are 45 years old today; they would first begin to feel the reform in 22 years, when they reached 67.

 

The same problem of delay would afflict a reform of Medicare designed to raise the eligibility age for Medicare in tandem with increasing the social security retirement age. Moreover, while young people can view with relative equanimity the prospect of having to work a couple of years more for full social security benefits—which are anyway rather meager—I don’t think they’d feel the same way about losing Medicare in their late sixties. A big difference is that there is no ceiling on Medicare benefits, and the expected benefit of receiving them is therefore much greater than the expected benefits of social security—and young people know it.

 

It seems to me that, in the short run, the only realistic measures for reining in social security and Medicare are a combination of higher payroll taxes and means testing. In the long run, social security and Medicare benefits will be cut to affordable levels when the United States finds itself in the same desperate fiscal situation as Greece, but probably not before. The only hopeful note is that the current widespread public concern with deficits may embolden some legislators and the even the Administration to propose strong measures to head off a fiscal crisis exacerbated by entitlements spending.

The Controversy over For-Profit Colleges—Posner

Conservative economists believe that the basic regulatory mechanism of a capitalist economy should be antitrust law, designed to preserve competition; because as long as a market is competitive, the self-interest of producers and consumers should operate to maximize the value of the market’s output. Of course if the activity of the market participants produces external costs or benefits—costs or benefits to nonparticipants, as in the case of pollution, competition will not optimize output. Output will be too large from an overall social standpoint if the externality is a cost, as in the pollution example, and too small if the externality is a benefit, as in the case of education; hence the government’s subsidization of education.

A college that is operated for profit might seem a worthy object of subsidization. That was the view of the Bush Administration and led to the relaxation of a number of restrictions on the subsidization of such colleges, and so the number of students enrolled in them soared; it is now almost one million. Under what is known as the “Title IV” program, the government makes loans to college students to finance their education. Students at for-profit colleges are eligible for thesse loans. Title IV loans to such students have increased by 500 percent since 2000 and now amount to $26.5 billion a year, which is more than a quarter of all Title IV loans. A for-profit college may not derive 90 percent or more of its revenue from such loans, and the default rate of its students may not exceed 25 percent for three consecutive years. The for-profit colleges tend to keep just below the 90 percent and 25 percent ceilings, which means that the bulk of their revenue is derived from the federal government and that the rate of default of their students on the federal loans is very high. Defaulting on a student loan is particularly painful to the defaulter, moreover, because the unpaid balance of a federal student loan can’t be discharged in bankruptcy. Still, even the government can’t squeeze water out of a stone, so many of the defaulted loans are never repaid.

The default rate is so high because the dropout rate from for-profit colleges is so high; it probably exceeds 50 percent on average. (The overall college dropout rate is high too—about a third—but considerably lower than the for-profit college dropout rate.) In 2007, students at for-profit colleges were only 7 percent of all students in higher education (they are now close to 10 percent), yet they were 44 percent of all students who defaulted on their federal loans.

Steven Eisman is a very able hedge fund manager who was one of the few financiers to spot (and profit from) the financial collapse that crested in September 2008. He is one of the heroes depicted in Michael Lewis’s fine recent book, The Big Short. Eisman believes that there is an uncanny resemblance between the financial situation of the for-profit colleges and that of the banks before the collapse. See Steven Eisman, “Subprime Goes to College,” May 26, 2010, www.marketfolly.com/2010/05/steve-eisman-frontpoint-partners-ira.html. In both cases loans—mortgage loans in the bank case, student loans in the for-profit college case—were made to people who were at high risk of defaulting, and in both cases “rating agencies” (credit-rating agencies in the case of the banks, college accreditation agencies in the case of colleges), were afflicted with a conflict of interest because they were paid by the institutions whose securities (in the case of the banks) or educational programs (in the case of the colleges) they were rating. (For criticism of the accreditation agencies, see Melissa Kornm “New Scrutiny of Groups That Accredit Universities,” Wall Street Journal, June 7, 2010, p. A8, http://online.wsj.com/article/SB20001424052748703340904575285014094515910.html.)

Eisman thinks that the federal government is likely to lose $275 billion on its Title IV loans over the next decade. These defaults will not have the macroeconomic consequences of the financial collapse, but they will slow our economic recovery and increase the federal deficit.

The government is concerned. The Department of Education has proposed denying eligibility for federal-financed student loans to students who cannot repay their loans within 10 years by annual payments of no more than 8 percent of their starting salary. See Tamar Lewin, “Facing Cuts in Federal Aid, For-Profit Colleges Are in a Fight,” New York Times, June 6, 2010, p. A21, www.nytimes.com/2010/06/06/education/06gain.html?scp=1&sq=Eisman&st=cse. This would mean, for example, that a student whose first job paid $18,000 a year could borrow no more than $10,000.

The Department of Education has delayed action on the proposal, apparently in response to lobbying by the for-profit colleges. The proposal may eventually be watered down, if not abandoned outright, because no interest group has a big stake in shrinking the industry. If it were adopted, this “gainful employment” rule as it called might reduce student enrollments at such colleges by a third, by driving a number of for-profit colleges out of business. It would also lead to reductions in tuition for students in the surviving for-profit colleges by reducing the amount they could borrow from the government to pay college tuition. Despite their high drop-out rates, these colleges charge high tuition (often higher than public colleges charge) because the students can borrow most of it. The colleges are also very profitable, so most of them will be able to survive with lower tuition—which is a bit of a puzzle, since one expects competition to drive the average price of a product or service down to cost (including an allowance for profit, viewed as the cost of equity capital). It is possible, however, that the industry faces a sharply rising average-cost curve, so that the costs of the efficient firms are lower than the market price. In addition, demand for for-profit college education has been rising rapidly, and when demand for a product rises at a fast rate profits may rise because of delay in expanding supply.

The aggregate cost of the for-profit college industry is great. The $275 billion default cost to the federal government anticipated by Eisman is not a cost in the economic sense, but a transfer; it is money that goes from the government to the students to the colleges and stops at the colleges rather than being repaid by the students. But we cannot be insensitive to large government transfers, because they increase the federal deficit at a time when the national debt is growing at an alarming rate from an already very large base. These transfers are not costs but they give rise to costs.

The (other) costs of the industry, consisting of the opportunity costs of the teachers (and other staff) and the students, the considerable marketing expenses that the colleges incur to build enrolment, and other expenses, are substantial and the question is whether they generate commensurable benefits. Assuming that almost 90 percent of the industry’s revenues are the federal student loans and that the industry’s total costs are 90 percent of its revenues—the rest being profits in excess of the cost of equity capital—the total annual costs of the industry are equal to the student loans: $26.5 billion.

The benefits conferred by the for-profit college industry would consist in the first instance of any increased income of the graduates of these colleges (or of the drop-outs, assuming they attend for a significant time before dropping out) as a result of their having attended college, but also of the nonpecuniary benefits of their college experience and the benefits to society as a whole of a more educated population; the second and third types of benefit are impossible to measure, however.

It’s hard to believe that the dropouts obtain benefits commensurate with the costs, especially when we consider their opportunity costs—they might have been working and earning an income rather than attending college—and the interest and other costs to them of the loans, which remember they can’t shuck off by declaring bankruptcy. Among the graduates there are many defaults as well, which suggests that they don’t gain a lot from college attendance so far as bolstering their incomes is concerned. So it is quite likely that on balance the costs of the for-profit colleges exceed the benefits, and that costs and benefits would be brought into closer alignment if the new 10 percent-8 percent rule were adopted.

The big puzzle is why (to return to my opening point) the for-profit college market is not self-regulating—why, for example, for-profit colleges don’t emerge that set higher entrance standards and as a result can advertise truthfully that their students are less likely to drop out and therefore more likely to derive a net benefit from attending. Stated differently, if the 10 percent-8 percent rule is optimal, why doesn’t competition drive the industry to that level without the government’s having to intervene? For remember that most for-profit colleges would survive under such a regime, and some surely would thrive—in fact would be able to charge higher tuition than they do now because they would be offering a better product. Does anyone think that Harvard is hurting itself by having very high entrance standards? (The dropout rate at Harvard is 3 percent, and some of the dropouts, like Bill Gates and Mark Zuckerberg, go on to become billionaires.)

The solution of the puzzle may be, as Eisman argues, that the private-college industry, which is at a disadvantage in competing against nonprofit colleges because of the tax advantages, donor income, and direct state and federal support of nonprofit (including public) colleges, has targeted a class of people who cannot gain admission to those colleges because they do not meet their entrance standards. There is evidence that just as in the case of the marketing of mortgage loans during the housing bubble of the early 2000s, the for-profit colleges use aggressive advertising to attract students from low-income families that lack financial sophistication and the ability to evaluate the benefits of attending a for-profit college. These people—who may be the only people who would consider a for-profit college, because no other college would admit them—almost by definition have little information about higher education and are therefore prey to skillful marketing that even if literally truthful may create a misleading impression of the benefits of attendance at a for-profit college. For-profit colleges often pay recruiters by the number of enrollments that a recruiter generates. (The Department of Education is trying to prevent that with a new regulation.) Recruiters have been known to recruit at homeless shelters.

An alternative possibility, however, is that most of the people who attend a for-profit college understand the risk of failure but prefer to gamble on succeeding in obtaining a college degree and using the credential and what they have learned to obtain a much better job as a result—a job that will enable them to repay their loan and derive a net benefit from having borrowed it. (This is likewise a theory of why during the housing boom so many people took out adjustable rate mortgage loans, or home equity loans, that they could not “afford”—they were gambling, many with their eyes open.) College graduates earn substantially higher salaries than less-educated workers, but it is doubtful whether, in the aggregate, graduates of for-profit colleges earn enough more to compensate for the costs and the dropout risk.

Default Rates and For-Profit Colleges- Becker

Since a college education is expensive, many students would be unable to receive a higher education unless they got help with the financing. Some students are lucky to receive the needed resources from their parents, but many others in the United States and elsewhere have to borrow in order to attend college. The vast majority of loan programs available to students are highly subsidized by governments, either through direct government loans with generous interest rates and other terms, or through government insurance of loans from private banks combined with restrictions on the interest rates banks can charge students.

Even though student loans cannot be discharged through personal bankruptcy, default rates have been high. The average rate of default in 2007 was high, about 7%, but still much below the over 20% rate in 1990. In addition, many borrowers with lower incomes work out terms that involve slow and usually only partial repayments of the amounts borrowed. As Posner indicates, for-profits have a high default rate of close to 25% on their student loans. There is a clear hierarchy in default rates by type of school: For-profits have the highest default rates, followed by public and non-profit junior colleges, then by graduates of four year colleges, and graduates of medical and law schools, and other high earning professionals have the lowest default rates.

Since student loans are heavily dependent on government financing, governments have a legitimate and important interest in these default rates. Consequently, it is proper for governments to impose limits to colleges on both the fraction of their students who can default, and also on the fraction of students at a school who can receive government loans. However, the present default limits of 25% for profit-making institutions are too generous. Banks would be forced out of business if the default rates on their commercial loans were so high. The maximum allowable default rates should be cut to 15% %, or so. That itself, without any other changes, would give for-profit and other colleges much stronger incentives to police better who they accept as students since they would not want to exceed such more stringent ceiling on default rates.

A lowering of the permitted default rate is a far superior approach to reducing defaults than is the proposed limit on the amount of loans available to students who are expected to have low incomes. For it is hard in most cases to know in advance how much a student borrower will eventually earn. Students entering well-paying fields may turn out to do badly, whereas those entering poorly paying fields might do extremely well. Colleges have a strong incentive to police their default rates in order to remain eligible for student loans, but one can hardly expect government officials to be able to predict with any accuracy the eventual earnings of students applying for loans.

Unfortunately, various proposals to restrict loans to low earning students partly reflect the  federal government's desire to bash for-profit colleges. Yet these colleges play a significant role in the portfolio of college choices available to students. For-profit colleges appeal to older and fulltime working students who never received a college education. To be sure, the quality of the courses offered by for-profit colleges are generally are not so high. But many public colleges, such as Loop College in Chicago, or Santa Monica Junior College, also offer courses at the low end of the quality spectrum, and also have high loan default rates. That for-profit colleges can compete against highly subsidized public and private non-profit schools indicates that the for-profits are offering an education valued by certain students that is not available to them at other schools.

In addition, comparison of default rates between for-profit colleges and public colleges is not the right measure of how much government subsidies they receive. All public colleges and most private ones receive large direct subsidies from various governments that enable them to offer much lower tuition levels than are offered by for-private colleges. Many students in public colleges, especially the lower quality ones, also drop out without finishing, and also receive low earnings, after having been generously subsidized by governments. The right comparison between for-profit and public schools might be the increase in earnings of students per dollar of government subsidy, no matter what form these subsidies take. The for-profits may still look worse on this measure than do the public colleges they compete against, but the difference would be much smaller than the differences in default rates.

Some argue that for-profits can only compete by misleading students into believing they will benefit much more from such an education than they will actually benefit. Clearly, some of that does occur. However, even some of the best colleges and universities are quite misleading in their advertising and other attempts to attract students. For example, very few philosophy, French, or English Lit departments warn incoming students that jobs in their fields are scarce, and that most entering students may never get a decent job using their specialized training. To be sure, for-profits tend to be more flagrant in their efforts to attract students, but it is a difference in degree.

So my conclusion is that while stiffer default rules on government subsidized student loans are needed, for-profits should not be discriminated against in these rules since they offer valuable forms of education. Moreover, public colleges receive substantial direct government subsidies that for-profit colleges do not receive. With lower allowable default rates, for-profit (and other colleges) would cut back on the number of students accepted whom they expect to eventually default on their student loans.

 

 

Notice

We are not blogging this week, because of travel. We will resume this coming Sunday, June 20.

Will Africa Finally Take Off? Becker

After many decades of hopelessness, there are finally grounds for believing that sub-Saharan Africa may be close to taking off toward sustained economic growth. Africa has rebounded from the worldwide recession faster than many other nations. The International Monetary Fund estimates that African GDP rose by 4.7 per cent in 2009, and the Fund forecasts that Africa’s growth will increase still further to almost 6 per cent in 2010. The rate of economic progress is not uniform in all the African economies, but these are impressive figures for a continent that has disappointed for so long.

Several factors explain why Africa’s future looks rather bright. Probably number one is the continuing discovery in Africa of minerals and fossil fuels that are demanded by China, India, and other countries as world economic growth picks up. Experts estimate that the recently discovered coal deposits in Mozambique are the largest new coal reserves since the major finds in Australia during the 1960s. Oil reserves in Nigeria, Ghana, and other parts of Africa constitute more than 10% of the world’s reserves of oil, and South Africa has 40% of the world’s gold. Africa also has about one third of the world’s cobalt- a mineral used to prepare magnetic, wear-resistant, and high-strength alloys- and many other minerals.

Africa exports natural resources primarily to the rapidly developing countries like China, and to the US. For example, Africa’s trade with China has multiplied several fold during the past decade to reach more than 12 percent of total African exports, on par with Africa’s trade with the US.  Trade with India, Korea, and Brazil, although much smaller, is also growing at fast rates.

Governments in many African countries generally adopted a socialist approach to direction of their economies when they became independent nations after World War II. At that time, even many economic experts considered socialism and government management of an economy, as practiced very differently in the Soviet Union, China, and India, to be the best approach to economic development. Yet government control led to widespread inefficiency and corruption in Africa (and elsewhere) since these governments had neither the skills nor the incentives to conduct honest and effective public administration of the economy.

However, attitudes of African leaders toward markets and private business began to change a couple of decades ago, in part because the socialist approach failed. Also important was the rapid economic growth experienced by the Asian tigers, China, India, and Chile as these nations shifted toward greater roles for the private sector and smaller economic roles for government. Democracy has also become stronger in some African countries, although strongmen and other undemocratic leaders still are prominent in many African countries.

 While some optimism about Africa’s future is warranted, its future is not assured because Africa still faces important problems. Yes, the private sector in mobile phones, natural resources, and elsewhere has grown a lot in many African countries, but the expansion of private companies has often taken the form of crony capitalism rather than competitive capitalism. By crony capitalism I mean that governments give special protected positions to favored companies in important sectors of the economy rather than allowing competition among companies to determine who are the winners and losers. Crony capitalism is partly the result of a continuing excessive role of the government in the economy. At the same time it encourages government corruption because companies compete politically to obtain these favored positions, partly by bribing government officials to favor them. Crony capitalism may be better than socialist direction of an economy, but is is far inferior to competitive capitalism.

During the past 30 years, fertility has fallen in all regions of the world, including Africa. But the typical African women still has 5 children over her lifetime; a number that far exceeds that in every other region of the world. Families with many children do not have the resources to invest much in the education, health, and other human capital of their children. As a result, for example, the World Economic Forum’s index ranks South Africa at the very bottom in both math and science education out of over 100 countries considered.

Moreover, high birthrates eat up economic progress and limit the magnitude of increases in per capita incomes. However, if African economies continue to grow at a high rate, parents will begin to reduce rapidly the number of children they have in order to invest more human capital in each child, as has happened in every other country that experienced sustained economic progress.

Most African countries have enormous health problems due to the heavy incidence of malaria, Aids, and other diseases. For example, life expectancy in South Africa declined from 65 years at 1990 to just about 50 years as the prevalence of Aids among 15-49 year olds grew to about 20%. Yet great progress is possible in improving health in this region. Foreign assistance can be important in the health field through the provision of medicines, knowledge, and medical personnel,as long as the aid mainly goes to NGOs and other private African organizations rather than through corrupt governments.

Africa still gets too much foreign aid that raises government spending at the expense of the private sector. Net official aid to Africa has risen sharply since 1970 as shares of both government spending and GDP. In 2008, such aid constituted more than 30% of government spending and 4% of African GDP. India discovered during its first 40 years of independence that foreign aid-India used to be the world’s largest recipient of foreign aid- only slowed down the necessary adjustments toward a smaller government sector and a larger competitive private sector. Africa needs to learn the same lesson.

Clearly, for these and other reasons, economic progress in Africa is not assured. Yet the evidence provides grounds for far greater optimism about Africa’s future than at any time during the past 100 years.

 

Is Sub-Saharan Africa at a Turning Point? Posner

Sub-Saharan Africa became and remains the world’s poorest region in the post-colonial era. This is generally attributed to bad governments and to foreign aid, the latter because it enables countries to defer necessary reforms and enriches (and thereby helps to entrench) the countries’ generally bad (inept, vicious, corrupt) governing class.

Beginning in the mid-1990s, however, economic growth rates in the sub-Saharan countries rose briskly, reaching 6 percent in the 2000s (and this after having dropped between 1980 and 2000). This rate is not as impressive as it seems, because the sub-Saharan African population is growing by more than 2 percent a year. The increase in per capita income (less than 4 percent) is a more meaningful indicator of economic development. The economic growth rate dropped to 2 percent in 2009 as a result of the global economic crisis, which means that there was a decline in per capita income, but it is expected to reach 4 percent this year. (On the economic improvement in Africa since the mid-1990s, see Jorge Arbache et al., “Is Africa’s Economy at a Turning Point?” (World Bank Feb. 2008), http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/2008/04/14/000158349_20080414093531/Rendered/PDF/wps4519.pdf; on the impact of the current crisis on the economies of the sub-Saharan African nations, see “Sub-Saharan Africa: Back to High Growth” (IMF Apr. 2010), http://www.imf.org/external/pubs/ft/reo/2010/afr/eng/sreo0410.pdf.) Sub-Saharan Africa was not hit as hard by the economic crisis as the other regions of the world because its financial sector is small. Most of the capital that flows into the region comes in the form of foreign aid or foreign direct investment, rather than loans, and so the region was less affected by the credit crunch that followed the banking crisis of September 2008 than the rest of the world was.

A major factor in the region’s increased growth rate since the mid-nineties has been increased demand for commodities, such as oil and gold, which are major African exports, by China, India, and other rapidly developing countries; the increased demand has resulted in higher prices for these commodities. Many sub-Saharan African countries are net importers of commodities, and thus have been hurt by the higher prices. The countries that are the major commodity exporters, such as Nigeria, Angola, and South Africa, have grown at faster rates on average than the other countries of the region. Some of these other countries, however, have had fast rates of economic growth as well, and this may be due mainly to improvements in their governments in the areas of protection of property rights, curtailment of corruption, encouragement of private enterprise, and management of monetary and fiscal policy.

Will sub-Saharan Africa, having as I said weathered the global economic crisis rather well, take off economically and catch up with other regions of the world, such as East Asia, which a half century ago was poorer than sub-Saharan Africa? Perhaps so, but I have my doubts. To begin with, I have no idea how accurate these countries’ economic statistics are; the Greek debacle has reminded us of the importance of determining the accuracy of economic statistics before opining on a country’s economic performance.

Moreover, the higher growth rates of the sub-Saharan African countries  in recent years may be in part an artifact of the very substantial increase in foreign aid (roughly a tripling between 2000 and 2008) to those countries. And exports of raw materials (other than farm products) are not a very promising route to prosperity. Often they do not create a great many jobs in the exporting nation, in which event most of the income from the exports go either to the owners, many of whom are foreign, or to the governments of the exporting nations—and this means, in corrupt governments, into the pockets of government officials. Commodity prices are volatile, moreover, and no one can know whether they’ll be higher in real terms a decade from now.

Levels of education and health are very low in sub-Saharan African countries; life expectancy is low and is actually declining; productivity is very low; fertility though declining remains very high; poverty of course is widespread; ethnic conflict (often violent) and political violence are common; corruption is endemic; opportunities for women are meager. These impediments to economic growth will probably change very slowly because they are deeply rooted in African culture. And the rest of the world will not stand still while they change.