Political institutions decide the nature of economic institutions, shaping the destiny of nations
To recap the news of the year, here are the headlines again: Egyptian military dismissed the Parliament after the Arab Spring, Dmitry Medvedev returned to Vladimir Putin the seat he had warmed for four years, Kuwait?s emir dismissed the Parliament which was questioning his ministers, and Maldives saw its first democratically elected president deposed in a soft coup by the old guard. In Mexico, the party which held power for decades prepared to win again, while Pakistan?s president brazened out corruption allegations against him. In North Korea, son took over from father as the country sank further into darkness while in Iran, Revolutionary Guards broke up protests sparked by rigged elections which brought the regime?s candidate back to power. That?s all for this news bulletin, have a nice day.
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Why do nations fail? Why are some condemned to live in eternal poverty while some others enjoy the highest living standards? The question has always puzzled economists and historians. There have been theories and more theories ? geography theory, culture theory, ignorance theory, racial supremacy theory ? to solve the riddle. Some have been discarded, while others still command academic acceptance, finding their way into faulty policy prescriptions. Excellently researched and elegantly written, Why Nations Fail: The Origins of Power, Prosperity and Poverty by Daron Acemoglu and James Robinson is a path-breaking expedition in this direction. The book, which traces the origin of wealth in nations across history, helps explain why we stand where we are today, and why some fare better and some worse.
The Acemoglu-Robinson space-time capsule lifts off from the US-Mexico border, collects samples from the Mayan empire, hovers over pre-colonial North America, crosses the 38th Parallel dividing the Koreas, transits to the Neolithic Middle East, swoops into the jungles of pre-European sub-Saharan Africa, anchors over medieval Europe, studies colonial Asia and overflies ancient Japan and modern Australia to probe the roots of poverty and prosperity. It?s an exciting journey, well worth the ticket.
The core of the Acemoglu-Robinson thesis lies in the nature of institutions that shape the fate of nations. While ?inclusive? institutions incorporate a large share of population and cater to wider interests, sparking overall prosperity, ?extractive? institutions destroy wealth by extracting it and transferring it to a minority. The ultimate result is that nations which embrace inclusive institutions hit the highway to prosperity, while those who adopt and support extractive institutions shrink, implode or break apart. The authors assert that extractive political institutions may adopt inclusive economic institutions to create wealth ? look to China after Mao ? but since such a model forecloses the option of creative destruction, growth grinds to a halt after some time, unless political institutions undergo an overhaul. Lesson for policymakers: China?s authoritarian model isn?t the right one to emulate, unless you are okay with growth as a short-term affair.
Acemoglu-Robinson argue that political institutions and economic institutions shape the destiny of nations. Throughout history, political institutions ? royalty, aristocracy, feudalism ? have been extractive. These extractive political institutions devised and strengthened extractive economic institutions ? slavery, serfdom and monopolies ? which cemented their grip of power.
Two thousand years back, India was the world?s biggest economy. England was an insignificant outpost of the Roman Empire and the Americas had not even made it to the map. However, starting in the early part of the last millennium, England started taking baby steps towards pluralism with the Magna Carta. The Parliament, which represented some of the people, started asserting itself, and refused to accept every tax demand from the Crown without some trade-offs. While more powerful nations of the day like Spain ?nationalised? trade with Asia and America, a private merchant class emerged in England. As the country passed through the civil war and the Glorious Revolution, more power shifted to the population. Concurrently, the powers of the monarch declined. Together with state centralisation under the Tudor kings, this created the incentives for innovation, triggering the Industrial Revolution which spread to western Europe and to the United States. The world would never be the same again.
Industrial Revolution engendered prosperity in England, Europe and the US. But why did this happen in the British backwaters, but not in India, Spain or Argentina which were far richer and more advanced?
The authors trace the beginning of ?institutional divergence? to the Bubonic Plague, which exterminated half of Europe. Countries in the western part of post-plague Europe shook off slavery and serfdom, while forced labour intensified in the east. This led to greater rights for people, protection of copyrights and the emergence of a merchant class in England following the start of Atlantic trade, creating the ecosystem which spawned the Industrial Revolution.
Inclusive political institutions like democracy, pluralism and universal franchise distribute power among a vast swath of the population, besides instituting protection for property & patents, law & order and financial services. These economic institutions provide the incentives for savings, investment and innovation, laying the foundations of prosperity. Once prosperity takes roots, a virtuous cycle comes into play, as inclusive political and economic institutions support and promote each other, creating a perpetual cycle driving towards progress.
The opposite happens in dictatorships, faux-democracies and Communism. These extractive political institutions set up extractive economic institutions which gouge wealth, discouraging innovation and investment, condemning their people to eternal poverty and pain. The extractive economic institutions, in turn, support extractive political institutions, creating a painful vicious cycle. This explains why dictators, military and the ?old guard? seldom give up power on their own, and why such nations fail to break out.
Though the book was written during the Arab Spring when protesters brought down Mubarak, the authors issue a dire warning that the revolution may not endure and the power may go back to the old elite. The authors seem prescient: Just last week, the military dismissed the Parliament, took over legislative duties and assumed additional powers.
Why Nations Fail helps us position the contemporary world in its historical context. So, there was nothing surprising about the power grab by Putin, the Ayatollahs, the Maldivian elite or the Egyptian military ? history is replete with examples of enduring vicious cycles. In fact, it would have been surprising if elections had brought true democracy to Egypt, Russia, Maldives or Iran. That is the real tragedy of the modern world, and the key takeaway of this outstanding book.
Why Nations Fail: The Origins of Power, Prosperity and Poverty
Daron Acemoglu and James A Robinson
Profile Books
$16.76, Kindle edition