Monday, November 19, 2012

WHY NATIONS FAIL

Many of us wonder why some nations thrive and others do not.  Often we just feel that our winning culture is just superior.  Some of us liberal minded people look for explanations in geography.  Jared Diamond in "Guns, Germs and Steel" analyzed the occurrence of plants and domesticable animals to determine what areas had the best opportunities for growth.  Daron Acemoglu and James A Robinson (who has co-written with Jared) say this does not go far enough to explain modern differences in prosperity.

The authors contention is that success is based not on geography but on whether the power of a society is extractive or inclusive.  I understand them to mean by extractive the elites at the top extract as much as possible from the masses.  Inclusive refers to more people having some power.

One area where this makes a difference is with innovation.  The authors explain that innovation most often requires creative destruction, meaning that the old established way of doing things is done away with while livelihoods and political power have to adjust to new ways of doing things in order to survive.

In an extractive society those with power see innovation as a threat to their power.  To maintain their power it is necessary to resist any innovation even if they recognize it might benefit the society as a whole.  Examples given include the printing press and railroads amongst countless other innovations that have been resisted.  Some powerful people stay that way by adapting to new opportunities.

Reading the book it seems like most of history evolved with extractive societies.  The clever elite would arrange society to give themselves the most power which they used to get the most wealth. Slavery occurred in ancient civilizations including Egyptian, Greek and Roman.  Feudalism was less harsh, but was designed to make sure labour was for the benefit of the elite.

The Glorious Revolution of 1688 overthrew one English monarch, James II and replaced him with William III, but more importantly brought also the ascendency of the Parliament over monarchy.   Industrial Revolution in England was possible because power was dispersed over a wider class of people.  It depended upon innovators and entrepreneurs having opportunities and incentives.  Earlier the Magna Carta gave power to some aristocrats that loosened up the power structure a little.  The Black Death plague upsetting population also helped to shift power.  The trans-Atlantic trade when it came to England (not so much Spain and Portugal) also gave some leverage for some merchants to gain power.

The French Revolution represented a huge overturning of power.  It went through violence, dictatorship, even monarchs but the ideals spread with help of Napoleon.  Western Europe was liberated and those liberated from an extractive system were very resistant to going back.

A vicious circle refers to the situation where someone has power over everyone else and they are not willing to give it up.  The only way to overcome this is someone else with power overcomes them. Their motivation is almost always selfish, but if it is not selfish at the beginning they normally get corrupted.  The victims, ie. ordinary people have no incentives to work harder or offer ideas and usually no power that can be leveraged.

A good example of an extractive society is the system in southern United States prior to 1865. Slavery did not start in America, but was imported from Africa where slavery had a long history. Southern whites with enough resources soon learned they could increase their wealth immensely by controlling African slaves.  Slaves had no motive to improve efficiencies and innovation dried up. Slaves were freed because of the anger of northerners who had developed a more industrial society. But the Civil War did not end the oppression of the Africans as whites soon enacted what have come to be known as Jim Crow laws.  Finally they were done away with, but only after concerted efforts of both black activists and northerners.  As more people were part of an inclusive society, innovations occurred more frequently and wages improved for all.

A virtuous circle can be when somehow a lesser person is able to gain some power and over time extends that power to a wider base of people.  The person at the top has some dependency on this new power base or they most often would not allow it.  There is strength in numbers and as more individuals realize that they can gain in power.

Australia demonstrates how an inclusive society can develop.  Originally the pioneers were convicts whose personal rights were very restricted.  As time went on the administrators found it very impractical to not gradually increase their liberties.  They became entrepreneurial and innovative and mixed in with subsequent immigrants.

Another example of how an inclusive society developed was Botswana, in the middle of African colonial powers was able to get some relief from British authorities after a visit to England by some chiefs.  At the time they were one of the poorest nations in Africa, but because they developed an inclusive society they became one of the richer ones.  Fortunately for them diamonds were not discovered until after independence.

Still another example comes from Brazil.  They had suffered dictatorships, but in 1978 Lula was able to organize factory workers and have them empowered.  Brazil is now known as one of the developing nations to watch.

One of the things I got out of this book was a reflection on our current situation.  The tendency of elites to concentrate their power and their disdain for the common man is easily detectable in modern politics. How does inequality develop?  Those who have power are motivated to increase their power. They feel they are special, an exception to the rules.  A few have insight and can appreciate that "we are all in this together," but others feel they are deserving of a better deal than those others.  Why should they pay extra taxes so lazier people don't have to work.  Maintaining an inclusive nation requires vigilance.  The book recounts leaders who recognized that some innovations would raise standard of living for the masses, but felt threatened and when possible prevented innovations.

Modernization is not enough to succeed.  China has modernized, but has not developed an inclusive society and the authors predict unless it does they will decline.  A key word is empowerment.  When people have the power to make a difference  most of them will use that power to make things better for themselves.  Others will recognize there is strength in numbers.

I do recommend this book as it does give a very useful perspective for what we as individuals need to encourage.  Read more about the book and a current blog by the authors at http://whynationsfail.com/

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