Sunday, 8 November 2015

My Reflections on 'Why Nations Fail'

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My travels abroad made me aware of the large wealth disparities between countries. Wondering if this had always been the case, I read ‘Why Nations Fail’ by Acemoglu and Robinson. I found it to be an enjoyable and comprehensive insight into why some countries are prosperous and others are not. This piece is more of a collection of my thoughts after reading this book, rather than a review. Throughout the book the authors’ claims are supported by historical examples from across the globe, thus also providing readers with a wealth of historical knowledge. 

 Politics and economics have strong links with each other. For me, economics is a study of people making choices, but it is politics which ultimately enables them to make these decisions. According to the authors, it is this link that determines the prosperity of a country and its citizens. ‘Inclusive economic institutions...make best use of their talents and skills’. This is only the case because there are usually also inclusive political institutions in place. For example if there are property rights in place, like patents, entrepreneurs then have an incentive to think of new ideas, thus best using their abilities. However under an exclusive institution there may be little stimulus to innovate since ideas could easily be stolen and the people know there is nothing they can do.

 Politics is generally not the first reason that comes to mind when people think of why countries are poor. Acemoglu and Robinson do well in addressing the other hypotheses behind the causes of poverty. The ones covered in this book were the geography, culture and ignorance hypotheses. Although refuted by the authors, I also had points to say on these theories. 

 The geography hypothesis claimed that poorer countries lay within the tropics of Cancer and Capricorn while ‘richer nations, in contrast, tend to be in temperate latitudes’. The Industrial Revolution occurred in Britain and was readily implemented in countries outside of the tropics such as the United States of America. Yet during this time many countries within the tropics were colonised i.e. countries in Latin America, Asia and Africa. Would the Industrial Revolution have been introduced for the benefit of the whole population in these countries, as it was elsewhere? That would be unlikely. Infrastructure like the railways were introduced in such nations but this was for the transportation of goods rather than use by the general population. 

 I thought further on a point mentioned briefly in the book, that economics assumes political problems have been solved. When thinking on how to solve economic issues, I only considered the macroeconomic policies that could be implemented and what the consequences of intervention would be for the government. Yet only after reading this book I realised that we never think, at least in relation to economics, about whether people have the human/economic rights to improve their economic welfare. It is just assumed to be the case, at least in a free market economy. There are many assumptions made in economics and it was interesting to find another one myself. 

 According to Schumpeter, ‘gales of creative destruction’ accompany technological improvements. For example, once railways were introduced in the USA, horse-drawn carriage makers started losing their jobs. This is proof of how new technology takes a toll on old technology. Thus, nations may also fail because certain groups of people may not want it to succeed. One pertinent example in the book was that of the aristocracy in Eastern Europe. The Industrial Revolution moved workers from farms to towns, and many nobles in Western Europe lost people who had worked on their land. This was not the case in Eastern Europe because the nobility wanted to keep their power and hence prevented the large rise of factories. Though there remained people to toil on farmland, modern day Eastern Europe is poorer than Western Europe partially because industry was not allowed to develop. 

 I found this to be one example of the assumption, often true, that people are inherently acting in their own self-interest. Individuals and firms will act on incentives available to them. The Eastern European nobles had the incentive to not allow technological change to happen in their countries because it ensured that there was labour remaining to earn money for their royal landlords. Moreover, it prevented the redistribution of wealth to merchants and factory owners. 

 Though unfamiliar terms were initially used, for instance exclusive and inclusive institutions, I felt that there is a very brief conclusion as to why some nations don’t fail. Nations prosper when they have property rights and a centralised local authority. In my opinion this is because the state must be powerful enough, i.e. centralised, to enforce rules such as property rights. I also feel that it is important for there to be a broad distribution of political rights in a country. This is because economic growth can come from any individual; anyone can be a consumer, or in the labour force, or even an entrepreneur! Once everyone enjoys political rights they can exercise their economic rights i.e. the right to copyright their inventions and buy goods to improve their economic welfare. Why Nations Fail offered me a new theory for the success of countries which was substantiated with a lot of evidence. Thus we are also indirectly presented with a solution to alleviate poverty; equipping people with political and property rights. I think that an issue in economics is that we often think too much in theory than reality. I felt this towards the end of the book; changing the political systems in a country, and moving away from failing nations, is easier said than done.

Extra Links

Book Website

If you're interested in reading a review of this book, I'd recommend this one by Jared Diamond:

What Makes Countries Rich or Poor?