The world needs inclusive institutions to succeed

Progress is based on “creative destruction – a new technology is developed, and suddenly the old forms of wealth are no longer so valuable

A few weeks ago your editor told you about a book he had just finished reading, “War and Peace and War: The Rise and Fall of Empires” by Peter Turchin.

This week it’s “Why Nations Fail: The Origins of Power, Prosperity and Poverty” by Daron Acemoglu and James A. Robinson.

Turchin’s thesis was that empires form along frontiers where people face a threat from a foreign culture. In order to overcome that threat they need to develop asabiya – the capacity for collective action.

Working together cooperatively allowed people to form empires, such as Rome, Russia and the United States. Eventually, however, with the threat overcome, people lose their asabiya. The rich become richer, the poor poorer, and the society falls apart.

Acemoglu and Robinson have a similar thesis in their book, but they come at it from a slightly different angle.

They give credit to the development of different institutions to explain why some nations, such as South Korea, have become wealthy while others with similar backgrounds and opportunities, such as North Korea, remain impoverished.

Progress is based on “creative destruction,” they say. A new technology is developed, and suddenly the old forms of wealth are no longer so valuable.

Those whose power and prestige are based on the old forms of wealth naturally are opposed to this and will do whatever they can to prevent it from happening.

Creative destruction therefore does not happen in societies with extreme differences in wealth and power. Those in power have no interest in allowing anything that might endanger the status quo.

Societies with egalitarian institutions, on the other hand, allow for and encourage growth. Creative destruction is seen as a good thing, even if it is not labelled as such.

Acemoglu and Robinson start their book by contrasting the city of Nogales, Arizona with Nogales in Mexico. Those who live in Nogales north of the border have average incomes of $30,000 per year, high rates of education, and high life expectancy by global standards.

Those who live south of the border have income about one-third of those to the north. Most have not graduated from high school and their life expectancy is much shorter than those living just a short distance away.

The geographies of the two cities are the same, as are the ethnic backgrounds of the majority of their citizens.

The only real differences are the political and economic institutions they live under.

The people of Nogales, Arizona live under American political and economic institutions, which are essentially inclusive and democratic. In contrast, those living in Nogales, Mexico have to struggle under political and economic institutions that are essentially extractive – a tiny minority runs the country for its own benefit.

Inclusive political and economic institutions tend to be self-sustaining and resist efforts by elites to undermine them. The same can be said about extractive institutions, unfortunately.

It is extremely difficult for a nation that is caught up in extractive institutions to switch over to inclusive ones.

The thesis explains why, despite so many billions spent, foreign aid has failed to improve the lives of so many people in so many Third World countries. The fact is the money, rather than going to help the people it was intended for, has actually been diverted to help the wealthy elites.

The ideas presented in “War and Peace and War” and “Why Nations Fail” are not mutually exclusive. In fact, they complement and reinforce one another.

They both point out the importance of people being able to work together and trust one another, and the dangers in allowing a small minority gaining too much power and wealth.

 

Globalization is breaking down the power of nation-states and bringing us into one worldwide marketplace. That will lead inevitably to a world government. We need to ensure that government is based on asabiya and not simple greed.