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Random Rants

Why nations fail and remain poor: Part I, Forget what you think you know!

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It is time therefore that the world generally, and the utterly ineffective UN took a long hard look at their misplaced and often self serving policies in attempting to eradicate poverty and human misery.  

The perceived wisdom (generally thought to be true) on why some nations are stuck in a never ending cycle of poverty generally falls into three categories.

1. The country is geographically disadvantaged in terms of soil, climate, rainfall, desert etc.

2. The prevailing culture lacks a strong work ethic, has outmoded religious beliefs, or any of the traits associated with economic development.

3. The government and rulers of the country are ignorant and simply don’t know how to develop and advance the country.

Geography-Culture-Ignorance! Consider then FORGET!!!

 These are well described in the book Why Nations Fail by Acemoglu & Robinson BUT the authors write at some length to completely debunk these supposed reasons for the failure of any nation.

For example what is the geographical difference between Mexico and Southern USA, North and South Korea; what is the cultural difference between Botswana and Zimbabwe? These pairs are all next door to each other but one of each pair is rich and one poor! 

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Let’s take a look at some specific negative cases from the book:

 The uprising and regime change in Egypt is leading to real development which has nothing to do with geography or culture: In fact, Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated, and has been used to create great wealth for those who possess it, such as the $ 70 billion fortune apparently accumulated by ex-president Mubarak. The losers have been the Egyptian people, as they only too well understand.

 It was January, 2000, in Harare, Zimbabwe. Master of Ceremonies Fallot Chawawa was in charge of drawing the winning ticket for the national lottery organized by a partly state-owned bank, the Zimbabwe Banking Corporation (Zimbank). The lottery was open to all clients who had kept five thousand or more Zimbabwe dollars in their accounts during December 1999. When Chawawa drew the ticket, he was dumfounded. As the public statement of Zimbank put it, “Master of Ceremonies Fallot Chawawa could hardly believe his eyes when the ticket drawn for the Z $ 100,000 prize was handed to him and he saw His Excellency RG Mugabe written on it.

 Now a positive example from Africa:

How did Botswana break the mold? By quickly developing inclusive economic and political institutions after independence. Since then, it has been democratic, holds regular and competitive elections, and has never experienced civil war or military intervention. The government set up economic institutions enforcing property rights, ensuring macroeconomic stability, and encouraging the development of an inclusive market economy. But of course, the more challenging question is, how did Botswana manage to establish a stable democracy and pluralistic institutions, and choose inclusive economic institutions, while most other African countries did the opposite? To answer this, we have to understand how a critical juncture, this time the end of colonial rule, interacted with Botswana’s existing institutions.

The significant difference in ALL of these example is between EXTRACTIVE and INCLUSIVE economic and political institutions, poor countries being Extractive rather than Inclusive. Back to Why Nations Fail again:

 Central to our theory is the link between inclusive economic and political institutions and prosperity. 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 and that fail to protect property rights or provide incentives for economic activity. Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy. Similarly, extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.

1489215997414 In conclusion, extractive institutions pave the way for complete state failure, destroying not only law and order but also even the most basic economic incentives. The result is economic stagnation and—as the recent history of Angola, Cameroon, Chad, the Democratic Republic of Congo, Haiti, Liberia, Nepal, Sierra Leone, Sudan, and Zimbabwe illustrates—civil wars, mass displacements, famines, and epidemics, making many of these countries poorer today than they were in the 1960s. 

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It is time therefore that the world generally, and the utterly ineffective UN took a long hard look at their misplaced and often self serving policies in attempting to eradicate poverty and human misery. Throwing money at the problem has never worked and in Part II of this article I will deconstruct the fallacy of Foreign Aid as a catch-all solution especially as applied to Nepal.

  
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Discussion

One thought on “Why nations fail and remain poor: Part I, Forget what you think you know!

  1. Good analysis and look forward to reading about foreign aid and Nepal especially!

    Liked by 1 person

    Posted by Dr C | March 12, 2017, 12:36

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