The secret of economic strength Lessons from history.Why Nations Fail
The Origins of Power, Prosperity and Poverty
By Daron Acemoglu & James A. Robinson
[pounds sterling] 25 Profile Books
Just why some countries prosper why others languish in poverty is a question that has been, and is, asked continually by both economists and social scientists. For Daron Acemoglu and James A. Robinson, the joint authors of this compelling new book, the answer is clear.
Taking as a case study the twin communities of Nogales-the one located in Arizona, US, the other located in Sonora, Mexico-Acemoglu and Robinson compare and contrast the two sides of a city that straddles an international border.
While the inhabitants, in general, share a common culture, a common climate, a common geography and a common prevalence of infectious diseases, the peoples lead very different lives.
This, Acemoglu and Robinson argue, is because north of the border there exist the economic and political institutions of the US that foster positive social development. South of the border, those institutions are lacking and, therefore, the entrepreneurial spirit is absent as is business investment. To underpin their argument, the authors take alternative theories that might explain Nogales' disparities and tease out explanations that counter these conjectures.
Clearly, in the case of Nogales, geography cannot be said to provide a valid argument for the differences but the idea that the modern world's inequalities are created by where a country is located, whether temperate or tropical, is still popular in certain quarters. This school of thinking, first formulated by the French political philosopher Montesquieu and more recently advocated by the development economist Jeffrey Sachs, does not really stand up to scrutiny, the authors state.
It is contradicted, Acemoglu and Robinson write, by "the recent rapid economic advance of countries such as Malaysia, Singapore and Botswana".
And an associated hypothesis, put forward by the evolutionary biologist Jared Diamond, that argues that the origins of intercontinental inequality lay in the differences in endowment of various flora and fauna is also worth exploring.
Diamond contends that where there existed large numbers of animals that could be domesticated by man, the shift from hunter-gatherer to farmer was much more attractive. And, the argument follows, where farming dominated, technological innovation was a lot more rapid which, in turn, stimulated prosperity.
In fact, Acemoglu and Robinson appear to have some sympathy for Diamond's thesis of earlier human development, but still they believe that it cannot make a valid argument for modern world inequality. As they point out, both China and India had many animals and plants and yet many of the world's poor are in these two countries.
So might the rich/poor differences be explained not so much by geography but by culture? "The culture hypothesis, just like the geography hypothesis, has a distinguished lineage, going back to the great German sociologist Max Weber," write the authors.
They accept that it is not politically correct to articulate in public, but nevertheless posit the commonly held view that Latin Americans suffer from a manana (tomorrow) culture or that Africans are poor because they are not prepared to work (this echoes Weber's idea that the Protestant work ethic spurred the rise of the modern industrial society and prosperity in Western Europe).
But they comprehensively demolish this thinking by pointing out that at one time it was thought that Chinese culture and Confucian values were inimical to economic growth, "now the importance of the Chinese work ethic as the engine of growth in China, Hong Kong and Singapore is trumpeted".
The authors further explain their own hypothesis, that it is the establishment of economic institutions that determine whether a country becomes prosperous or poor (and it is political institutions that determine what economic institutions are created), by taking an historical example from pre-colonial Africa.
The Kongo example
They examine the reasons that technologies were not developed in many parts of Africa (surely another politically incorrect observation) by investigating the Kingdom of the Kongo, at the mouth of the River Congo in the modern DR Congo.
Having come into contact with the early Portuguese explorers and learned of the wheel and the plough, under King Nzinga a Nkuwu, who later converted to Catholicism and changed his name to King Joao I, the Kongolese resisted adopting these technologies.
It was not that the Kongolese were averse to European technology indeed, they very quickly adopted the use of the musket it is just that they had no incentives to take up other European technologies such as the wheel or the plough.
The fact is that Kongolese elites were utterly predatory-taxing and expropriating property at will and fully prepared to profit from the trade in African slaves. So it made no sense for the ordinary people to run the risk of developing enterprises that, if successful, ran the risk of being seized by the king, and the king had no use for the plough to increase agricultural output because, with European guns to aid him, he made so much more capturing and trading slaves.
Somewhat controversially, Acemoglu and Robinson write: "It might be true today that Africans trust each other less than people in other parts of the world. But this is an outcome of a long history of institutions that have undermined human and property rights in Africa.
The potential to be captured and sold as a slave no doubt influenced the extent that Africans trusted each other historically." It would seem that the authors are here suggesting that it is historical events, rather than cultural factors (in this instance the influence of Europeans) that predetermine a country's economic trajectory. "Just like the geographical hypothesis," the authors write, "the culture hypothesis is also unhelpful for explaining the lay of the land around us today."
Later in the book, Acemoglu and Robinson comment, "the contrast of North and South Korea, and the US and Latin America, illustrates a general principle. Inclusive economic institutions foster economic activity, productivity growth and economic prosperity. Secure property rights are central, since only those with such rights will be willing to invest and increase productivity."
In one chapter, Acemoglu and Robinson look at the opposite of inclusive economic institutions-extractive economic institutions. Once again they turn to Africa, to Zimbabwe in particular, to explain their viewpoint.
It is clear that they are less than sympathetic towards the country's president, Robert Mugabe, but they still retain the objectivity to explain that the roots of the shortcomings of many economic and political institutions in Zimbabwe, as is the case for much of sub-Saharan Africa, can be traced back to the colonial era.
"Upon independence in 1980: Acemoglu and Robinson observe, "Mugabe [then newly independent Zimbabwe's prime minister] took over a set of extractive economic institutions created by the white regime." The difference was, as Acemoglu and Robinson write with barely disguised contempt, that while the complexion of the extractive economic institutions changed (from white to black) the real difference was that instead of Ian Smith and the whites doing the extracting, it was Mugabe and the political elites filling their pockets. "Nations today fail because extractive economic institutions do not create the incentives needed for people to save, invest and innovate," Acemoglu and Robinson reiterate.
Indeed, they write that extractive institutions that expropriate and impoverish the peoples and block economic development are quite common in Africa, Asia and South America. Furthermore, the phenomenon of extractive economic institutions, they believe, is also likely to lead to civil war and a collapse of the state. They cite the examples of Angola, Cote d'Ivoire, DR Congo, Mozambique, Republic of the Congo, Somalia, Sudan and Uganda.
"So another reason why nations fail today," they continue, "is that their states fail. This, in turn, is a consequence of decades of rule under extractive economic and political institutions."
They illustrate that it was possible to avoid the postcolonial extractive economic institution trap, drawing attention to Bechuanaland, later to become independent Botswana. At independence in 1966, the country was one of the poorest countries in the world, surrounded by hostile white-ruled territories-but within 45 years it became one of the world's fastest growing economies.
And how was this miracle achieved? Obviously, its diamond wealth, developed in the 1970s, helped hugely, but in the view of these authors, what was pivotal was that independent Botswana rapidly developed inclusive economic and political institutions.
In their words: "Botswana would succeed in taking a path towards inclusive institutions, whereas much of the rest of sub-Saharan Africa did not even try, or failed outright."
'The idea that the modern world's inequalities are created by where a country is located, whether temperate or tropical, is still popular'
At independence in 1966, Botswana was one of the poorest countries in the world, surrounded by hostile white-ruled territories