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Romney's Palestinian Gaffe -- How Countries Get Wealthy

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On his recent trip to the Middle East Mitt Romney wanted to compliment the Israelis on the success of their economy. Yet, his clumsy comments boiled down to a suggestion that the comparative poverty of Palestine (i.e., West Bank and Gaza Strip) was a lack of Israeli "culture." The implied insult registered with the Palestinians. Was the presidential candidate making a fair point about the wealth of nations? Or was he gratuitously insulting Israel's neighbors?

The first point to make is that understanding why one country is rich and another is poor is extremely complex and not well understood even by development experts. Secondly, there are several factors affecting national wealth that are largely out of the control of a country's residents.

To begin with, poor countries are mostly located next to poor neighbors. Sub-Saharan Africa is one such impoverished region. So is the Middle East if recently oil-rich states are excluded. Likewise, wealthy nations are clustered together, as illustrated by Europe.

One likely reason for the clustering of poverty and wealth is that nations are enriched by international trade so that a country having wealthy neighbors is liable to conduct more trade and become wealthier itself. Trade is also enhanced by abolishing tariffs and duties so that new entrants to the European Community experience a bump in prosperity.

Human capital matters, of course. As a nation of immigrants, Israel receives educated people from around the globe and benefits from their expertise. Palestine loses many of the best and brightest who seek out their fortune in other places.

Along with human capital, Israel is the recipient of foreign direct investment and a healthy tourist industry brings in foreign currency.

The role of foreign investment is illustrated by Ireland's Celtic Tiger economy that catapulted the country from being one of the poorest in Europe to one of the wealthiest in the world within a decade. Many of the world's major technology companies set up there to obtain access to Europe's markets. They were attracted by a well-educated workforce, and lenient corporate taxation. Their arrival opened up tens of thousands of good jobs annually and reversed the historical pattern of brain drain to the U.S., Britain, and elsewhere.

Such huge foreign stimulus in a small economy is unusual, of course, and it seems quite unlikely to assist the Palestinians given the political problems they face, internal and external.

So Romney suggests that if only the Palestinians could pull themselves together as the Israelis have done that they might be as prosperous. Yet, it does not work like that. There are factors in geography and the physical environment that affect rates of development. In making that case, of course, one might be accused of propagating an even more depressing message -- that the Palestinians and residents of other poor countries are doomed to economic misery by factors outside their control.

Yet, that is not necessarily true. Being located in sub-Saharan Africa does not doom a country to poverty, for instance. Indeed, many economists look to Africa as an engine of economic growth for the future.

One of the key sources of optimism is the widespread adoption of wireless technologies that allow business people to surmount some of the infrastructural problems that held them back in the past, including bad roads and the dearth of navigable rivers.

Anyone who doubts such rosy predictions of Africa's future should look at South Africa, a country with a strong industrial base and a rising middle class despite its tortured colonial past, impoverished neighbors, and a major HIV/AIDS epidemic.

Perhaps Romney should have said that wherever a country is located, it can achieve prosperity in time. If South Africa and Ireland can overcome their political and economic problems, so can Palestine. Both were dominated by colonial overlords who cast doubt upon their capacity to succeed.

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