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prosperous countries. The median age in Germany, Italy, and Japan is more than forty, while many Third World countries— from Angola to Zambia— have median ages below twenty. Not only do young people usually earn less than middle-aged people, in countries around the world, much production in higher income countries goes to deal with the special problems of older people.

More than one-fourth of the populations of Germany, Italy, and Japan are more than 60 years old.1 6 The additional production of things needed to cope with the infirmities of age— crutches, walkers, and medications ranging from Geritol to Viagra— make older people better off than they would be without these aids but not better off than young people who do not need them. If there were some feasible way to make adjustments in the data to take account of all such things, the statistical differences between more prosperous nations and poorer nations would then more accurately reflect the differences in real standards of living. The differences would still be there but not as extreme as the statistics make them appear.

Since all countries were once at least as poor as Third World countries are today, what needs to be explained is not poverty but the creation of wealth— and the things that increase or decrease the ability to create wealth.

Law and Order

One of the common denominators of prosperous times and places has been law and order. Put differently, times and places where it has been difficult to establish law and order have seldom prospered. Sometimes geography has been the problem. Mountainous regions have often been lawless regions, simply because the cost of providing police or military control in isolated and thinly populated areas is often so much more than the cost of establishing and maintaining control in lowland plains. Wherever government authority breaks down for whatever reason, as in Western Europe after the collapse of the Roman Empire, economic stagnation or even retrogression is seldom far behind. It has been estimated that it was a thousand years after the collapse of the Roman Empire before

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the standard of living in Europe rose again to the level that it had achieved in Roman times.

The same thing can be seen on a smaller scale in American black ghettoes where the devastating riots of the 1960s not only destroyed existing businesses but kept out many new businesses for more than a generation since then. Even despotic laws, as under Genghis Khan or in the Ottoman Empire, have fostered economic prosperity when these laws have been dependable, rather than capricious or corrupt. One of the hallmarks of many Third World countries, especially those with otherwise favorable economic prospects in terms of natural resources or other favorable geographic factors, has been ineffective, capricious, or corrupt law enforcement.

Nigeria, for example, has oil and better navigable waterways than most of sub-Saharan Africa, but has repeatedly been ranked among the world s most corrupt nations, if not the most corrupt. The same geographical fragmen­ tation of sub-Saharan Africa which more direcdy handicapped Africa's economic development has also done so indirectly by making the establishment of law and order over wide areas difficult to achieve. As a study of the effect of culture on economic development put it:

If you are really looking for societies characterized by unrestrained greed and weak government, sub-Saharan Africa is the place to find them...

The "governments" of these countries are corrupt businesses, more akin to the Mafia than to public services.17

Countries fragmented into areas under the arbitrary rule of local warlords— whether Afghanistan today or the clan chiefs in the Scottish highlands in centuries past— have likewise remained mired in poverty. Law and order involve more than physical security, essential as that is. For economic activities that take some time, property rights are a prerequisite, so that those who farm or invest in business can feel assured that the fruits of their activities will be theirs. Even people who own no property have a large stake in property rights, if they are to be employed in an economy made prosperous by the presence of property rights.

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Perhaps the easiest way to understand the role of property rights is to see what happens in their absence. Even in countries where property rights have not been formally abolished, the costs of legally validating ownership of a home, a farm, or a business may be prohibitively expensive, relative to the average income level in a given country. This is in fact a common situation in Third World countries. The Economist magazine has estimated that, in Africa, only about one person in ten works in a legally recognized enterprise or lives in a house that has legally recognized property rights. In Egypt an estimated 4.7 million homes have been built illegally. In Peru, the total value of the country's real estate that lacks property rights has been estimated to be more than a dozen times greater than all the foreign direct investments ever made in the country during its entire history. A similar prevalence of economic assets not recognized by the legal system has been found in other Third World countries.1 8

Such lack of legal recognition is not a mere formality. It is a crippling handicap for those seeking to rise from poverty to prosperity, whether as individuals or as nations. Many of the great corporate enterprises of the world began at an extremely modest level, such as those already achieved by innumerable entrepreneurs in the Third World. The Hewlett-Packard corporation, for example, began in a garage that was rented with borrowed money; the J.C. Penney department store chain was begun by a man who grew up in worse poverty than most people on welfare today; the NBC broadcast network was begun by a man who had to support himself as a teenager by hawking newspapers on the street. The list could go on and on. But all these people without money lived in a society where they had access to other people's money, as a result of a legal system where property rights facilitated the transfer of money from those who had it to those who had entrepreneurial talents but no money.

The Third World is full of peddlers who remain peddlers all their lives. But, in the United States, it was peddlers who began such enterprises as Macy's, Bloomingdale's, and Levi Strauss. For businesses in general, whether large or small, the availability of other people's money is often crucial. Without property rights, lenders are reluctant to lend to people who do not have the cash to pay them back— and whose homes or other assets are

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not recognized as theirs by the legal system, and therefore cannot be used as collateral that can be foreclosed and transferred to the lender in case of default.

Businesses that start small and grow large can seldom get off the ground by issuing their own stocks and bonds before they have established a track record of success. And they have little chance of establishing such a track record without money. Many Third World peddlers and other small-scale entrepreneurs cannot draw on other people s money beyond the narrow circle of their own family and friends, but developing a large corporation requires drawing on money from thousands of strangers, beginning with getting their money indirectly from banks or other financial intermediaries. An absence of property rights cuts off that process early on.

The problem is not simply that particular individuals in the Third World who might become corporate leaders in a society with property rights lack that opportunity. The more fundamental and more important fact is that the whole society could benefit from having numerous major corporate enterprises to provide more goods to consumers, jobs for workers, and tax revenues to governments.

The formal legal system is not the only aspect of law and order. The levels of honesty, cooperation, and civic virtue among the people is not only of social but of economic consequence. For example:

Malagasy grain traders carry out inspections of each lot of grain in person because they don't trust employees. One third of the traders say they don't hire more workers because of fear of theft by them. This limits the grain traders' firm size, cutting short a trader's potential success. In many countries, companies tend to be family enterprises because family members are the only ones felt trustworthy. So the size of the company is then limited by the size of the family.19

What economist William Easterly has called "the radius of trust" varies gready from group to group and from country to country. Within groups like the Marwaris of India, the Chinese in Southeast Asia, or Hasidic Jews in New York's diamond industry, transactions involving substantial sums of money can take place without written agreements or recourse to the legal system, giving these groups competitive advantage over other members of