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Why Nations Fail and Why Investing in People is a Pre-requisite for Building Both Strong Institutions and Strong Economies

August 4, 2012

In his 2006 book The End of Poverty, then U.N. Millennium Development project director and Columbia University professor Jeffrey Sachs argued forcefully that if countries at the bottom of the ladder of economic well-being were helped to get a footing on that ladder’s lower rungs, they then could complete the job of pulling themselves out of poverty.  But the same year, NYU economist William Easterly published his The White Man’s Burden with its argument, summarized in the subtitle, that “the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good.”  In his 2007 book, The Bottom Billion, Oxford’s Paul Collier, earlier a director of the Development Research Group at the World Bank, emphasized corrupt governments, civil wars, blood diamonds, and ways that the international community might help poor countries escape from their adverse political spirals.  MIT economists Abhijit Banerjee and Esther Duflo’s 2011 entry, Poor Economics, turned away from issues of international action to highlight the randomized trial method of program analysis which they’ve helped to pioneer, also shining a spotlight on the survival strategies of the world’s poorest.  2012’s Why Nations Fail by MIT’s Daron Acemoglu and Harvard’s James Robinson, takes, instead, a big picture and historical focus.

Since 2008, of course, a great many people in what were once more easily labeled the “rich countries” have been feeling a lot less rich, and accordingly they might have less guilt to assuage over matters of responsibility to the world’s poor.  The debate about the causes of wealth and poverty matters, however, even to those who feel they no longer have the luxury to worry about the poorest, because it has equal bearing on questions crucial to future American jobs and prosperity, including those that revolve around the prospects of China and other “emerging” economies.  If Acemoglu and Robinson are correct, China’s recent decades of economic growth are attributable to economic policy reforms that will ultimately run out of steam due to the unwillingness of the ruling Communist Party to open the door to “inclusive political institutions.”  But based on a more geography-centered view like that of Sachs, which focuses on factors like coastal access, climate and disease along with the critical requirement of generating enough savings to invest in its people and infrastructure, China can continue to reap the blessings of its temperate climate and coastal location.  This might especially hold true if recent massive investments in transportation infrastructure succeed in unlocking also the potential of the country’s vast interior, home to more than a half billion people whose economic well-being has been less decisively improved by China’s mostly coastal growth sprint.

Why Nations Fail makes a valuable contribution by focusing attention on the importance of political and economic institutions, and on the interactions between them.  But its insistence on assigning all responsibility for differences in growth outcomes to the presence of bad vs. good institutions overlooks numerous facts, and if taken too seriously, could stand in the way of better local and global policy decisions.

In my research on long run determinants of global inequality, I point out that much of the pattern of differential economic outcomes distinguishing world regions such as rich versus lower income countries of the Americas, the advantages of western versus eastern Europe, the plight of sub-Saharan Africa, the recently improving conditions in South Asia, and the breakneck growth of the Far East, can be explained by first understanding how geographic factors determined the origin and spread of agriculture and the subsequent uneven growth of urban/agrarian civilizations in some but not all parts of the world, then adding atop this picture an analysis of how the era of European colonization and domination of the world beginning in the 15th century led to the shifting of populations and technologies among continents and to the industrial revolution and the still greater technological lead of Europe and its overseas offshoots like the United States.  With such background, one can then take a closer look at the era, mostly beginning in the late 20th century, in which other once-advanced agrarian societies including Japan, Korea, China, and most recently India, began a process of rapid catch-up, while societies lacking such previous advantages remained stuck in extreme poverty, and the already industrialized societies of Europe, North America, and Australia/New Zealand worked to consolidate and protect their advantages.  The main outlines of this approach are laid out in chapters 8 and 9 of my book The Good, The Bad and The Economy: Does Human Nature Rule Out a Better World?

Why Nations Fail pays plenty of attention to the colonial era and its consequences, too, but by downplaying the prior differences in technological and political development that made it possible and paying insufficient attention to the movements of population to the New World, Australia and New Zealand, and even to Old World locales like Taiwan, Singapore, and South Africa that resulted from colonial rule, they misread the record of uneven economic growth during the past five hundred years as one demonstrating the importance of institutions alone, while missing the indications of strong persistence of  advantages in human skill and social capability.  In their view, for example, the overtaking of the then advanced Mexico and Peru of the pre-colonial era by the then less developed lands that became the U.S. and Canada is all about the more liberal, investment-promoting economic and political institutions that were put in place in the latter because the colonizers found there a smaller indigenous population to be exploited through extractive policies.  Although there’s much truth in such observations, they miss the point that there’s been no actual overtaking of “advanced” peoples by “backward” ones due to the magic of good institutions.  Rather, emptier, temperate lands simply invited an influx of people from more technologically and politically advanced lands to what became the U.S. and Canada, whereas Mexico and Peru had the dual disadvantage of bad institutions and of populations predominantly descended from societies which did remarkably well under difficult circumstances but which had been cut off from the myriad advances in metallurgy, mathematics, literature, and other fields that occurred on the Eurasian land mass during the thousands of years after their ancestors crossed over into the New World.   Related observations correlating the civilizational advantages of different peoples before 1500 with the economic status of the countries of today, while accounting for large scale migrations, help to explain the comparative developmental advantages today of countries ranging from Taiwan and Singapore to Jamaica, Fiji, and Papua New Guinea.

The sober recognition of the extent of persistence of social advantages that my research points to might well be seized on by proponents of a racialist fatalism, but this is not my view at all.  Quite the contrary, my goal is to understand better the true reasons why some are rich and others poor so as to find more effective ways to help close the gap.  I see my research as pointing to the importance, alongside more obvious factors like economic policies and institutions, of the human dimension in economic and social development, which includes not just formal education but a wide array of skills, practices, and attitudes.  Finding ways for societies to invest in their people, as Taiwan and South Korea have done—and as the U.S. needs to redouble its efforts to do better—is probably the most important thing that can be done to end poverty.  Unfortunately, spending money on education isn’t sustainable without generating the means to pay for it in the short to medium term.

Having opened the door on such a vast topic without intention of writing another book here, let me break the discussion off and return shortly.

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