Some of the Reasons Why Nations Fail

Henry Srebrnik, [Summerside, PEI] Journal Pioneer

 “Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few.”

This is the thesis propounded by economist Daron Acemoglu and political scientist James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity and Poverty,” published last year.

In countries with “extractive” economies, those in power destroy incentives and discourage innovation by creating an uneven playing field.

The elites who gain from the extraction also benefit from rigged political institutions, “wielding their power to tilt the system for their benefit.”

However, this inevitably produces instability and failure because it creates the motivation for others to depose the existing elites and take over, often through a coup d’etat. One set of exploiters succeeds another.

So states that are at the mercy of “extractive” economic institutions eventually collapse, the authors contend.

They cite numerous examples to illustrate their argument.

North Korea is a kleptocracy controlled by the armed forces and the Kim family, and its economic institutions make it almost impossible for people to own property. The state controls everything, so people don’t work for themselves, thereby destroying their incentive to succeed.

Such a regime, regardless of its military prowess, will never acquire legitimacy, whereas its South Korean neighbour has created a society with economic institutions that “encourage private property, uphold contracts,” and allows for “the entry of new businesses that can bring new technologies to life.”

Egypt’s Hosni Mubarak, who ruled from 1981 until deposed on 2011, allowed big businessmen known as the “whales” to use their power to create monopolies and block the entry of new people and firms.

This, the authors note, blocked opportunities for the vast mass of Egyptians to move out of poverty. The country’s economic future remains precarious.

Libya’s Gadhafi family looted their country’s resources, to its detriment. Oil-rich states are particularly prone to this type of behaviour on the part of despots.

Central American countries like El Salvador and Guatemala, where small elites rule over an impoverished peasantry and appropriate most of the wealth, also make sustainable growth next to impossible.

In other places, the problems result from the failure to maintain an effective state, assert Acemoglu and Robinson. In such circumstances, there is no hope of providing order, a system of laws, a market economy, property rights, mechanisms for resolving disputes, or basic public goods. Many African countries, such as the Congo and Somalia, fall into this category.

Countries with extractive economic and political institutions may achieve temporary success – the Soviet Union was one such case – but they eventually stagnate.

The authors emphasize that none of this is preordained; human agency is always involved. Had a rising economic class in Britain in the 17th century been unable to overcome a repressive monarchy, for example, things might have gone in a very different direction. Whereas Russia might have followed a more “inclusive” path after 1917, had the Communists not seized power.

So the jury is still out on whether China can continue its present rate of growth. It is contingent on the path its rulers will follow.

In a nutshell, Acemoglu and Robinson argue that the wealth of a country depends on the degree to which the average person can participate in economic opportunities and share in the overall growth of its economy.

Economic opportunity sustains political democracy. This is a lesson even some developed nations seem to have forgotten in recent years.