Monday, 29 June 2020

“Why Nations Fail”

Source: Global Risk Insights


Daron Acemoglu of MIT and James Robinson of Harvard co-authored a book entitled as above. Their study of rise and fall of economies all over the world concludes that China is on course to reach about a third of U.S. per capita income by late 2020s and about 40% of that in the 2030s. It will be difficult to progress further, if China remains a “copycat” economy.

A good analogy is the Soviet Union in the middle of the 20th century. Moving from agrarian into an industrial economy, it was one of the fastest growing economies. Then it ran out of steam in the 1970s. Malaysia similarly had remarkable growth in the 80s and 90s and then settled for a sedentary pace of 4-5% p.a., with no Covid-19.

Acemoglu calls them “extractive” economies run by a narrow political elite for their own benefit. Such economies hardly innovate because innovation means allowing new “champions” to emerge and outcompete existing power players. In China (or Malaysia) the economy is dominated by large state enterprises often controlled by elites or some political members of a ruling party (or coalition).

Malaysia, China or others like them can be innovative if political reforms and key institutions are strengthened to act independently. For example, a judiciary that acts fearlessly and competently will encourage innovation - knowing that intellectual property will be protected. Falsified research, malaise in standards, rampant copying, abuse of human rights, violation of basic universal values are all elements of a decline. Why did Rome fall? A steady deterioration of values; increase in corruption and intrigue; and, weakened institutions ensured its eventual demise. Not barbarians at the gates!

‘Black Lives Matter’ is a renewal for America. The Trump moral morass is now under a renewal reset. Campaign slogans work for a while but real change is needed.

That’s where Acemoglu and Robinson’s major thesis is – economic prosperity depends on inclusiveness of economic and political institutions. When people have a say in the decision-making, that is inclusiveness. When talent and creative ideas are rewarded, that is inclusiveness. When minorities feel they are part of a large tent, that is inclusiveness. In contrast, “extractive” institutions are those that extract wealth from the non-elite. Nations with a history of extractive institutions have not prospered – Congo, North Korea, Haiti, Somalia, Zimbabwe, Egypt, Pakistan, Myanmar and many others. They are poor because the ruling elite has organised society for their own benefit at the expense of the people.

The choice for the rich is whether it is taxation and redistribution or will the poor decide for renewal or revolution as the way forward. The rich have the incentive to propose a taxation rate that doesn’t provoke a revolution, while not losing too much of their benefits. So, democratization refers to a situation where the rich “willingly” increase monetary redistribution to the poor in order to avoid a revolution.

In short, authoritarian economies choke-off sustained, long-term growth and prosperity. Inclusiveness, equality and diversity enable societies to flourish and prosper. And institutions where strengthened provide the platform for this to take shape. This postulate has critics who cite technology, geography, productivity, leadership as other factors for nations to succeed. Whatever the case, we in Malaysia are at a critical stage in our development and leaders need to look at issues objectively rather than be coloured by lenses of race and religion.  


Reference:

1. Marshall Ingwerson, ‘Why Nations Fail’: Will this be China’s century? www.csmonitor.com
2. Ed Sappin, Five reasons China will fail to dominate in business, CNBC
3. Warren Bass, Book review: ‘Why Nations Fail,’ by Daron Acemoglu and James A. Robinson,   The Washington Post
4. Why Nations Fail, www.wikipedia.org

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