I was always wondering about the most effective way to help move billions of people from the rut of poverty to prosperity. More philanthropy from the wealthy nations of the West? As J.W. Smith points it, with the record of corruption within impoverished countries, people will question giving them money as such ‘donations’ rarely ‘reach the target’. Building industries instead? While that approach seems to provide better results (see few examples described by Ray Avery in his book ‘Rabel with a cause‘), it still did not provide a silver bullet solution, as it does not address the roots of poverty and prosperity.
From Christian Bowe
In their book ‘Why nations fail?‘, that examines the origin of poverty and prosperity, Daron Acemoglu and James Robinson conclusively show that it is man-made political and economic institutions that underlie economic success (or the lack of it). Therefore only the development of inclusive political and economical institutions can provide a long-term sustainable solution to poverty. Based on fifteen years of original research, Acemoglu and Robinson marshal extraordinary historical evidence from the Roman Empire, the Mayan city-states, medieval Venice, the Soviet Union, Latin America, England, Europe, the United States, and Africa to demonstrate that nation’s prosperity and poverty are determined by the incentives created by economic and political institutions.
First-world countries became rich because their citizens overthrew the elites who controlled power and created a society with more inclusive political institutions, where political rights were much more broadly distributed, where the government was accountable and therefore more responsive to citizens, with certain constraints and checks placed on politicians. As the result, more inclusive economic institutions developed in those countries with secure property rights, unbiased system of law, public services, access to education, open to relatively free entry of new businesses, where the great mass of people could take advantage of economic opportunities. Inclusive economic institutions provided a level playing field in which people can exchange and contract, choose their careers. They created incentives for education and innovation, essential for the sustainable economic growth which is almost always accompanied by technological improvements that enable people, land and existing capital to become more productive.
Unfortunately, in most societies throughout history and today political institutions concentrate power in the hands of a few, without constraints, checks and balances or rule of law. Economic institutions in those societies are then often structured by this elite to extract resources from the rest of the society and are therefore called ‘extractive’. When existing elites are challenged under extractive political institutions and the newcomers break through, the newcomers are likewise subject to only a few constraints. They thus have incentives to maintain exclusive political institutions and create a similar set of extractive economic institutions.
As an example, while industrialisation was booming in the Western Europe, in the Russian Empire it was blocked by the absolutist monarchs with unlimited power due to their fear of losing power. Opposing the changes in society necessary for promoting economic prosperity, Nicholas I aimed at strengthening the traditional pillars of the regime (particularly the landed aristocracy) and keeping the society rural and agrarian. No loans were available for the industry. The State Loan Bank was lending money to large landowners only with serfs used as ‘security’. Serfdom was hardly efficient as treated like slaves, serfs had little incentive to improve the land and increase productivity. However, it was politically effective. Several industrial exhibitions, showcasing new technology and facilitating technology adoption, were banned. Sever limits have been placed on the number of factories that could be built in Moscow to stop any further concentration of potentially rebellious workers in the city. Opposition to railways accompanied opposition to industry. As the result, the economy of Russia stalled in the 19th century.
The absolute monarchy in Russia was replaced by communism in the 20th century. Contrary to Marx’s vision of a communism as a system that would generate prosperity under more humane conditions and without inequality, the practice turned into a bloody affair with no humane aspect to it. Equality was not part of the equation either, since the first thing Lenin and his entourage did was to create a new elite, themselves at the head of the Bolshevik Party. In doing so, they purged and murdered not only non-communist elements, but also other communists who could have threatened their power. That was followed by Stalin’s collectivisation and his all-too-frequent purges that have killed tens of millions people. As in Cambodia in the 1970s under the Khmer Rouge, in China and in North Korea, communism in Russia brought vicious dictatorship and widespread human rights violations. The economic institutions, created under these regimes, were designed to extract resources from the people, and by entirely abhorring property rights, they often created poverty instead of prosperity.
From YesterYear Once More
Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. This is true today in Africa, in South America, in Asia, in the Middle East and in some ex-Soviet Union nations. While having very different histories, languages and cultures, poor countries in these regions have similar extractive institutions designed by their elites for enriching themselves and perpetuating their power at the expense of the vast majority of the people on those societies. No meaningful change can be expected in those places until the exclusive extractive institutions, causing the problems in the first place, will become more inclusive.
What about countries which enjoyed the inclusive institutions in the last century? Are they moving from a virtuous circle in which efforts by elites to aggrandize power are resisted to a vicious one that enriches and empowers a small minority?