Daron Acemoglu, an economics professor at MIT and James Robinson, a professor of government at Harvard, have co-authored Why Nations Fail: The Origins of Power, Prosperity and Poverty to study the question of why some nations are more prosperous than others.
The book’s biggest strength is the examples it quotes from around the world. It starts with a discussion of the twin towns of Nogales, one on the American side of the border, the other on the Mexican. The American part has an average income of US$ 30,000 and the citizens have access to health, education and employment opportunities. Moreover, the government has provided facilities such as roads, transport, communication and public health. Also importantly, citizens have liberty to exercise their democratic rights, to replace their mayors, congressmen and senators.
On the other hand, on the Mexican side, people are not as well-educated and grapple with manifold problems like inadequate health facilities, lack of public amenities, rampant corruption and inept politicians. The authors assert that culture, geography or climate have not affected the inequality between two towns.
According to them, “while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.”
Countries across the globe fare differently in terms of economic success due to differences in institutions, the rules which govern the economy and incentives that are provided to people. Acemoglu and Robinson argue that “inclusive institutions” allow people to effectively participate in economic activities and enable them to utilise and nurture their skills and talents. Economic institutions ensure secure property rights, impartial and unbiased systems of law and justice and provision of public services. “Inclusive economic institutions also pave the way for two other engines of prosperity: technology and education,” they say, adding that “sustained economic growth is almost always accompanied by technological improvements that enable people (labour), land and existing capital (buildings, existing machines, and so on) to become more productive.”
Inclusive economic institutions are dependent on underpinnings created by inclusive political institutions which pave the way for a broader distribution of power and eventually resources in a society and restrain groups in power from usurping and capriciously exercising it for their own benefit.
The authors substantiate their argument by highlighting the vast disparity between South and North Korea. South Korea laid the foundations for a society that creates incentives, rewards innovation and allows its citizen to freely participate in economic activities. The economic success has been sustained because the government is accountable and responsive to the public.
On the other hand, people in North Korea have faced famines, inflationary trends and political repression.
The authors claim that growth under extractive institutions is not sustainable for two reasons: lack of innovation and resistance by the elite. Creative destruction, which is the driving force behind modernisation and replaces the old with the new in the economic realm, terrifies the power elite.
The policies formulated by Stalin and the subsequent leadership of Russia did produce rapid economic growth. However, they were not able to produce sustainable growth and in the 1970s, the growth stalled. The authors attribute this to lack of incentives and the fear of creative destruction in the power elite.
The inventions that kicked off Britain’s Industrial Revolution — the steam engine, spinning jenny, etc — might never have come about in a society that suppressed creative destruction and denied property rights. The authors have highlighted three factors responsible for the emergence of a more inclusive political institution after Britain’s Glorious Revolution and the French Revolution. The first was that the business classes and the merchants were willing to come to terms with the power of creative destruction which would inevitably benefit them. Secondly, merchants, industrialists and diverse political groupings came together to eradicate extractive institutions. Furthermore, there was already a tradition of parliament dating back to the Magna Carta in England and the Assembly of Notables in France. The authors emphasise that “both revolutions happened in the midst of a process that has already weakened the grasp of the absolutist, or aspiring absolutists’ regime.”
The authors also look into why Botswana, after its independence, has emerged as one of the fastest growing countries in the world while other African nations such as Zimbabwe, the Democratic Republic of Congo and Sierra Leone are still mired in poverty and violence.
Botswana set up economic institutions which enforced property rights, created macroeconomic stability and encouraged inclusive market economy. Legislation which envisaged that all subsoil mineral rights would be vested in the nation and not in tribes and effectively forestalled the creation of economic inequities, was put in place. Botswana also had relative political centralisation and pluralistic tribal institutions that survived colonialism. The traditional elite willingly ceded its power in favour of inclusive political institutions and elections have been regularly held leading to political stability.
The authors note that countries with extractive institutions lead to the concentration of wealth and power in the hands of the few at the top which culminates in strife, unrest and civil war. Extractive institutions neglect investment in rudimentary public services, causing political instability. As Acemoglu and Robinson say, “nations that have achieved almost no political centralisation, such as Somalia and Afghanistan, or those that have undergone a collapse of the state such as Haiti, are unlikely either to achieve growth under extractive political institutions or to make major changes toward inclusive institutions.”
By Daron Acemogly and James
Crown Business, USA