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Prosperity through the right ­institutions

by Rebecca Renz

In brief

Students during a lecture, Woodpecker Seminar, Francistown, Botswana.

Students during a lecture, Woodpecker Seminar, Francistown, Botswana.

To understand the reasons of a nation’s success, it makes sense to analyse the interaction of economics and politics. This is the approach taken by economist Daron Acemoglu and political scientist James A. Robinson in “Why nations fail”.

Poor education, inadequate health care and lacking job opportunities are symptomatic of increasing inequality worldwide. The causes are the topic of the book which was published in 2012. Acemoglu is a professor at the Massachusetts Institute of Technology and Robinson teaches at the University of Chicago.

The book argues that understanding differences in countries’ institutions is essential to explaining disparities in national prosperity. According to the authors, institutions are engines of development to the extent that they allow individuals to grasp economic opportunities and create incentives to start new and innovative businesses. The performance of economic institutions, they argue, depends on political institutions.

Acemoglu and Robinson differentiate inclusive institutions from extractive ones. Inclusive institutions allow ordinary people to participate in economic activities and thus create a level playing field. Good government-run schools are an example because they allow young people from all social strata to learn and they serve the goal of equal opportunities. Extractive institutions, by contrast, merely serve the interests of the elite.

Economic and political institutions are interdependent. Inclusive economic institutions support inclusive political institutions, and the latter reinforce the former. In societies marked by inclusive institutions, the power of the state is geared to safeguarding the needs of all people. Moreover, a sense of impartial law and order prevails. If extractive institutions predominate, by contrast, a small minority gets its way and public life is marked by corruption and authoritarianism.

According to Acemoglu and Robinson, extractive economic and political institutions are the root cause of national failure because they impede or even block economic growth entirely. In such settings, “creative destruction” is needed, according to the authors, as only new inclusive institutions can reverse matters and facilitate healthy development. How­ever, extractive institutions tend to resist change and often prove lasting.

Historical circumstances determine what kind of institution prevails in any given society, according to the authors. Moreover, peoples’ prior experi­ence with institutions shapes what they expect of institutions in the future.

The book includes several case studies. The trajectories of Botswana and Zimbabwe, two former British colonies, are very different, for example. After independence in 1960, Botswana quickly developed inclusive economic and political institutions. An old sense of pluralism had survived colonial rule, and it was reflected in the new institutions. From 1960 on, Botswana prospered as democratic nation with regular elections. It has never experienced civil war or military rule.

By contrast, Zimbabwe gained independence in a liberation war in 1980, inheriting a set of extractive economic institutions from the colonial power. The ruling party ZANU-PF kept a tight grip on the econo­my and stayed in control of state-run industries. New and innovative private-sector companies could not flourish. Under ZANU-PF’s extractive and repressive regime, the economy eventually collapsed. In real terms, Zimbabwe’s per-capita income in 2008 was only half of what it was in 1980.

These and other examples demonstrate how certain circumstances lead to either inclusive or exclusive institutions – success or failure. In the authors’ view, the success of prosperous nations rests upon sound political institutions. Acemoglu and Robinson show convincingly that market forces, left to themselves, do not make nations prosper. They need an appropriate political environment that not only rewards the strongest members of society but offers opportunities to everyone (also see article in D+C/E+Z e-Paper 2018/08).

Acemoglu, D., and Robinson, J. A., 2012: Why nations fail. Crown Business New York.

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