May 17, 2012


What Makes Countries Rich or Poor?: a review of Why Nations Fail: The Origins of Power, Prosperity, and Poverty
by Daron Acemoglu and James A. Robinson  (Jared Diamond, 6/07/12, NYRB)

There is no doubt that good institutions are important in determining a country's wealth. But why have some countries ended up with good institutions, while others haven't? The most important factor behind their emergence is the historical duration of centralized government. Until the rise of the world's first states, beginning around 3400 BC, all human societies were bands or tribes or chiefdoms, without any of the complex economic institutions of governments. A long history of government doesn't guarantee good institutions but at least permits them; a short history makes them very unlikely. One can't just suddenly introduce government institutions and expect people to adopt them and to unlearn their long history of tribal organization.

That cruel reality underlies the tragedy of modern nations, such as Papua New Guinea, whose societies were until recently tribal. Oil and mining companies there pay royalties intended for local landowners through village leaders, but the leaders often keep the royalties for themselves. That's because they have internalized their society's practice by which clan leaders pursue their personal interests and their own clan's interests, rather than representing everyone's interests.

The various durations of government around the world are linked to the various durations and productivities of farming that was the prerequisite for the rise of governments. For example, Europe began to acquire highly productive agriculture 9,000 years ago and state government by at least 4,000 years ago, but subequatorial Africa acquired less productive agriculture only between 2,000 and 1,800 years ago and state government even more recently. Those historical differences prove to have huge effects on the modern distribution of wealth. Ola Olsson and Douglas Hibbs showed that, on average, nations in which agriculture arose many millennia ago--e.g., European nations--tend to be richer today than nations with a shorter history of agriculture (e.g., subequatorial African nations), and that this factor explains about half of all the modern national variation in wealth. Valerie Bockstette, Areendam Chanda, and Louis Putterman showed further that, if one compares countries that were equally poor fifty years ago (e.g., South Korea and Ghana), the countries with a long history of state government (e.g., South Korea) have on the average been getting rich faster than those with a short history (e.g., Ghana).

An additional factor behind the origin of the good institutions that I discussed above is termed "the reversal of fortune," and is the subject of Chapter 9 of Why Nations Fail. Among non-European countries colonized by Europeans during the last five hundred years, those that were initially richer and more advanced tend paradoxically to be poorer today. That's because, in formerly rich countries with dense native populations, such as Peru, Indonesia, and India, Europeans introduced corrupt "extractive" economic institutions, such as forced labor and confiscation of produce, to drain wealth and labor from the natives. (By extractive economic institutions, Acemoglu and Robinson mean practices and policies "designed to extract incomes and wealth from one subset of society [the masses] to benefit a different subset [the governing elite].")

But in formerly poor countries with sparse native populations, such as Costa Rica and Australia, European settlers had to work themselves and developed institutional incentives rewarding work. When the former colonies achieved independence, they variously inherited either the extractive institutions that coerced the masses to produce wealth for dictators and the elite, or else institutions by which the government shared power and gave people incentives to pursue. The extractive institutions retarded economic development, but incentivizing institutions promoted it.

The remaining factor contributing to good institutions, of which Acemoglu and Robinson mention some examples, involves another paradox, termed "the curse of natural resources." One might naively expect countries generously endowed with natural resources (such as minerals, oil, and tropical hardwoods) to be richer than countries poorer in natural resources. In fact, the trend is opposite, the result of the many ways in which national dependence on certain types of natural resources (like diamonds and oil) tends to promote bad institutions, such as corruption, civil wars, inflation, and neglect of education.

An example, mentioned in Chapter 12, is the diamond boom in Sierra Leone, which contributed to that nation's impoverishment. Other examples are Nigeria's and the Congo's poverty despite their wealth in oil and minerals respectively. In all three of those cases, selfish dictators or elites found that they themselves could become richer by taking the profits from natural resources for their personal gain, rather than investing the profits for the good of their nation. But some countries with prescient leaders or citizens avoided the curse of natural resources by investing the proceeds in economic development and education. As a result, oil-producing Norway is now the world's richest country, and oil-producing Trinidad and Tobago now enjoys an income approaching that of Britain, its former colonial ruler.
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Posted by at May 17, 2012 8:10 PM

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