Why do nations fail? – 国家为何失败? – English

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Mankind has always sought a path forward.

Why is it that some countries experience economic growth while others fail? Why is it that in this age of apparent prosperity, many countries are inclined to become embroiled in the nightmare of poverty and conflict? Ultimately, how long can the most important phenomenon of the age – the economic rise of China – persist? Are authoritarianism and economic growth compatible?

These are all classic questions posed in the study of political economy. A recent book by James Robinson of Harvard University and Daron Acemoglu of MIT, ‘Why Nations Fail’, has provoked wide ranging discussion. While the research papers on economic development, social equality, and democracy produced by the pair over the last ten years have long been essential reading for scholars of politics and economics, this text is a non-technical work for the general reader which, omitting the quantitative work in their research, deploys historical evidence, stretching from Venice of the middle ages, the colonial period in North America, the United Kingdom of the industrial revolution and twentieth century Africa to modern day China, to prove their main argument.

The book rejects cultural and geographical hypotheses (for example that countries located in the tropics are more likely to be impoverished, arguments whose main proponents include well known scholars Jared Diamond and Jeffrey Sachs), along with the explanation of “policy ignorance” (that is, the argument that countries are poor because their leaders do not know the correct policies to adopt). They believe the key determinant of success or failure lies in institutions, in particular: if the right political institutions are in place there will be good economic outcomes; a country’s prosperity must be built upon inclusive and pluralistic political and economic institutions, which will unleash and guarantee people’s capacity for innovation, investment, and development.

Inclusive political institutions require a centralization of political power, which guarantees basic law and order, but which must be widely dispersed and with checks and balances, like democratic elections and constitutional safeguards. Inclusive economic institutions include secure property rights, open markets, enforceable contracts, ease of establishing new companies and labor mobility. These kinds of institutions both allow and encourage the broad mass of people to become engaged in economic activity and develop their talent and skills, and thus giving people choices over their desires.

Extractive institutions allow small elites to subvert the interests of the large majority of people, while protecting their political and economic privileges. These are closed political institutions which are used by elites to create and maintain economic institutions that benefit a small minority and which deny new comers access to the market. Special privileges of the market are concentrated and there is a monopoly on political rights, which locks out aspirant political actors.

This can change the rules of the economic game, and is a form of vicious cycle.

There can be economic growth with extractive political institutions, especially if those elites are able to directly assign resources to highly productive activities they control, or if they allow a certain degree of inclusivity in economic institutions. However, these institutions are weak, and so, while extractive countries can produce economic growth to start with, it is very hard to sustain. This is because, firstly, sustainable economic growth requires, in the words of the great economist Schumpeter, ‘creative destruction’, which allows new technology to replace old, but which also threatens the interests of extractive elites, and is thus not permitted. For example in the ‘50s and’60s the Soviet Union experienced high speed growth but did not allow innovation, which left them lagging in the 1980s and which eventually led to collapse. Secondly, under exploitative systems, because rights and interests are concentrated amongst a small number of people, internal conflict occurs and leads more easily to self-destruction.

Naturally, this book also deals with China. The authors believe that the thirty years of reform and opening up were years of growth under extractive institutions where it was not possible to easily permit creative destruction, and so this growth will be difficult to sustain. The book raises the 2003 case of Dai Guofang and Jiangsu Tieben Iron and Steel, to highlight the difficulties of operating private companies under a socialist market economy. In fact, since 2003 the ‘state advances and the people retreat’ trend has only become more turbulent: of the top 500 companies in China, 82% are state owned and they hold 90% of assets. Yet, in terms of technological innovation, private companies far exceed state owned firms. It will be difficult for these extractive institutions to persist into the future.

The main value of this book is the new viewpoint it brings to the old question of whether authoritarian or democratic systems are more beneficial to economic growth. The difficult issue is, how do these inclusive institutions come into existence? In the book they are largely pessimistic, with the majority of examples raised being extractive institutions leading to intense political conflict or revolution. When it comes down to it, rulers are unable to relinquish power.

It seems that, along with de Tocqueville’s ‘The Ancient Regime and the Revolution’, this book is essential reading for those who wield power in China.

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Source : my1510

About julien.leyre

French-Australian writer, educator, sinophile. Any question? Contact julien@marcopoloproject.org