Does good government create wealth?

'Why Nations Fail' examines China's economic growth

'Why Nations Fail' examines China's economic growth

By Matthew Symington

A crisis of identity and confidence in the West has sparked a flurry of literature to reaffirm our principles. The Anglo-Saxon cocktail of democracy, liberalism and capitalism is jittering like an old TV, and needs to be bashed back into productivity. Several authors have stepped up to the challenge. In 2010 Ian Morris of Stanford University published Why the Rest Rules – For Now, and last year saw the publication of Niall Ferguson’s Civilization: the West and the Rest, in which the irrepressible historian revealed to the world the six ‘killer apps’ that fuelled Western growth and hegemony.

The latest such offering is Why Nations Fail: The Origins of Power, Prosperity and Poverty, a joint effort by economist Daron Acemoglu and political scientist James A. Robinson. These authors aim to restore simplicity to a subject often muddled by jargon, and they insist their theory is universal.

Northern Ireland is in need of such a theory, a coherent strategy which would set us on a positive trajectory and end our dependency on the public sector and the block grant. However the application of the theory espoused in Why Nations Fail is much less simple than the theory itself, partly because of its inherent limitations, and partly because its presentation is, at times, misleading.

The conclusions reached in Why Nations Fail are these: inequality of wealth and power cannot be a result of geography, culture, or knowledge, rather it can only be the result of political institutions which provide a stable and centralized authority, secure property rights, freedom and equality under the law, and pluralist representation in government.

Political stability, secure property rights and a robust legal system allow individuals and corporations to invest in the economy with confidence. Representative forms of government allow sections of society to petition for, among other things, economic reform.

Political structures which enshrine these things are labelled in the book as ‘inclusive political institutions’, whilst political structures which encourage corruption and expropriation are labelled ‘extractive political institutions’, the same applies for economic institutions. The authors also employ the term creative destruction to describe the economic growth provided by technological innovation, and the eradication of obsolete machines and jobs that follows.

Economic growth can only take place sustainably under inclusive political and economic institutions which incentivise investment in one’s property and which give entrepreneurs the freedom to create new technologies regardless of how likely they are to rock the boat.

In the city of Nogales, for example, which straddles the US-Mexico border, inhabitants enjoy vastly different qualities of life depending on whether they live in the democratic state of Arizona where laws are formed by an elected legislature and enforced equally, or under the corruption and high crime rate of the state of Sonora, Mexico.

The development of inclusive institutions depends upon how existing social structures interact with critical historical junctures; often this is down to historical contingency. Sub-Saharan Africa has been subject to two critical junctures in the last century and a half: colonisation and independence. If you think the consequences of these developments were inevitable then consider the case of Botswana.

In the late nineteenth century the tribal leaders of Botswana encouraged greater British control over their territory in a methodical and far-sighted strategy to repel the influence of Cecil Rhodes and his British South Africa Company, who sought to exploit their lands for mineral wealth. Botswana already enjoyed a fairly centralized political authority and pluralistic decision making procedures through a system of chieftaincy which relied on popular support. Upon independence in 1966 the country’s leaders built upon these institutions to construct a representative democracy. Since then the country has had sustained economic growth.

The history of Botswana, the authors argue, illustrates how small institutional differences in nations may result in colossal gaps in security and prosperity when they are worked upon by external factors or critical junctures directing those institutions towards either an inclusive or an extractive model.

Politics in this sense is a vessel through which economic prosperity is achieved. Robinson’s and Acemoglu’s treatment of it is, as such, shallow. The book states unashamedly that: ‘while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has.’ The analysis does not go much deeper than that. This is an omission, and one which has further ramifications.

For example Acemoglu and Robinson do not consider the idea of nationhood in itself, they simply accept as nations those polities which exist today or prominent ones which have existed in the past. In so doing they fail to address the economic consequences of political conflict or policies of non-compliance followed by disaffected peoples.

Moreover, it certainly cannot be said that in seventeenth century England, in which economic growth of the kind described by the authors first took off, society was organised or wars were fought for economic reasons. While these may have been a consideration, the bones of contention in the English Civil Wars and the Glorious Revolution were far more political, moral and religious in nature than anything else.

However this does not undermine the point that the right institutions will encourage economic growth. The best support for this point comes indirectly, as the authors demolish competing theories of global inequality. They do this methodically and with empirical simplicity.

Poverty cannot possibly be the result of geography, we are told, if the inhabitants of the city of Nogales, referred to above, can live in two vastly divergent wealth brackets.

It cannot possibly be the result of culture either; before the institution of a border on the 38th parallel in 1945 Korea was one of the most ethnically and culturally homogenous states in the world, yet now it is divided into two countries; one of the first world, one very much of the third.

Nor can poverty be a result of ignorance or misguided policy, since leaders of the world’s poorest countries have plenty of examples to follow and many developed nations and international organisations send advisers to guide policy makers in these countries. Zimbabwe was one of the wealthiest states in Africa before calamity was wilfully imposed upon it by Mugabe.

This method of argument is effective; relying as it does on hard facts which are easily observed. However the history in the book, and this is essentially a history book, is much less robust. A vast diversity of social, political and economic circumstances are ruthlessly corralled into one globalist narrative, resulting in a less convincing thesis.

Chapter five takes the reader on a whistle-stop tour from the planned economy of the Soviet Union, through the Lela and Bushong tribes in the Congo, to the Neolithic Revolution and finally to the Maya people of central America, all to make the point that economic growth under ‘extractive institutions’ is unsustainable.

Chapter six stops in at medieval Venice, ancient Rome, and the kingdom of Axum in modern day Ethiopia in order to illustrate changes from ‘inclusive’ to ‘extractive’ political institutions. The opposite transition is then observed in chapter ten in colonial Australia, revolutionary France, and Japan during the Meiji Restoration.

There is nothing explicitly wrong with the historical narratives utilized in this book, but their treatment is glib and does not do justice to the intensity of academic debate which surrounds them; British Tory historians will be particularly appalled by the interpretation of the Glorious Revolution in chapter seven.

There is one other major pitfall in the book’s thesis, and that is China. In a sense it feels as though this book has been overtaken by events, since research for it began fifteen years ago. Any book written in the last five years on the Western economic miracle must devote more than nine pages of its final chapter to the China question. Acemoglu and Robinson assert that China’s economic growth will not last. This rests upon their main point that growth under extractive institutions can only ever be limited.

“An important aspect of this is that property rights are not entirely secure in China. Every now and then… some entrepreneurs are expropriated. Labour mobility is tightly regulated, and the most basic of property rights, the right to sell one’s own labour in the way one wishes, is still highly imperfect… The connection between business and the party is highly lucrative for both. Businesses supported by the party receive contracts on favourable terms, can evict ordinary people to expropriate their land, and violate laws and regulations with impunity.”

China’s growth, argue Acemoglu and Robinson, is based upon rapid investment in existing technologies. As such China will benefit from having a lot of catching up to do, but will suffer when creative destruction threatens to destabilize the current economy and labour demographics. These points are promising, though too brief. Had they devoted a larger section of the book to deconstructing this issue more thoroughly their overall thesis would have benefitted greatly.

However, that the authors are willing to fly in the face of prevailing wisdom on the issue of Chinese economic growth is symptomatic of the book’s most redeeming feature, it’s rejection of determinism and support for the primacy of human agency, and the contingency of history.

Can such an analysis be applied to Northern Ireland? An attempt to do so highlights the difficulties created by Acemoglu’s and Robinson’s treatment of the term ‘nation’. England, and latterly the UK, is the primary example in Why Nations Fail of a state which has enjoyed sustained economic growth since erecting the nexus of benevolent institutions required to do so. Northern Ireland has undeniably been a beneficiary of this economic growth, Belfast was one of the leading industrial cities of the British Empire, and we continue to enjoy a standard of living much better than most of the rest of the world.

Yet Northern Ireland’s contribution to the UK economy has declined over the last half-century. The main reason for this is obvious enough, thirty years of conflict brought the Northern Irish economy to its knees. The authors of Why Nations Fail would refer to this as the collapse of a strong central authority: the law cannot be applied well and equally if the forces of law do not have widespread support, and certainly not if they are under attack; a region in conflict cannot sustain the confidence of investors; and secure property rights are no good if businesses fear that their property might be destroyed.

However since this study is primarily economic, and since it deals only with nations once they have sprung into being and does not consider the concept of a nation which is not physically manifested, there is nothing in this book which is useful to those seeking to construct a state which has the support of the people it purports to govern. What we are provided with is an inarguable economic case for maintaining peace, order, support for the law and its enforcers, and security of property.

One other point which it is important to consider is the theme of creative destruction. To some extent Northern Ireland has suffered from this trend as shipbuilding and textile industries have become mechanized and moved east. This began to occur long before the Troubles erupted, and the authors gloss over the fact that in a global economy creative destruction is often a regional nightmare. Yet the book does strongly make the point that economies which are slow to innovate will struggle, this is certainly true in Northern Ireland. Our economy is overly dependent on the public sector, the private sector is dominated by wholesale and retail, the level of business expenditure on research and development is far below that of similar small and peripheral economies, and the level of patenting from Northern Irish companies is also very small.

Leaders intent upon sustainable growth should therefore focus on innovation, which in turn requires a strong education system which pushes students to achieve academic and technical excellence: on this issue the Stormont Executive is going in the wrong direction by abolishing academic selection. There is a political element to this; only if Northern Ireland becomes an asset to rather than a drain upon the country to which it is attached will she have any meaningful input into her constitutional future.

If Why Nations Fail teaches us anything it is that the power to determine our future, and to achieve economic growth, lies firmly in the hands of civic society and her leaders, not in impersonal and abstract economic forces. The story of economic growth as envisaged by Acemoglu and Robinson is a very human story, just as poverty arises because, ‘those who have power make choices that create poverty.’