Have you ever wondered why some nations are rich and others poor? Why do some nations end up prosperous and tolerant, while others sink into poverty, despotism, and self-interested greed? There are a number of historically flawed arguments as to why this is the case. Ignorant individuals often driven through bias or outright racism have suggested that a nations geography or culture has an impact. But this is not the case. It comes down to the type of institutions a country has developed. These institutions cut across geography and culture. This is the premise of the book “Why Nations Fail.” So, what can we learn from the book?
A nations wealth or poverty isn’t based on its geography or culture
It was most famously claimed by the eighteenth-century French philosopher Montesquieu that people in warmer, more tropical climates were lazier than the harder working, more resourceful types who lived in more temperate climates. This is of course nonsense, but it is still a belief perpetuated wrongly by many. Likewise, a similar argument is often made by some in the wealthy west to argue why the west is wealthy is all down to culture or geography. But it is of course a fallacy, simply put, Asia is wealthier than the west. If you look at Global GDP, Asian GDP is larger. If you look at the top banks, car makers, telecoms companies etc, Asian companies dominate. Geography and culture have very little impact on determining the wealth of a country. We only have to look at North and South Korea to tell this story. There is no cultural or geographic difference, but the wealth of the two nations could not be more different. The same could be said of Singapore and some of its neighbours. What about the United Arab Emirates compared to some of its neighbours?
Prosperity is dependent on a nations institutions
The truth in explaining the difference between rich and poor nations is far simpler. What really matters are a nation’s economic and political institutions. Nations with inclusive institutions lead to a prosperous country and those with extractive institutions lead to the opposite. This is because inclusive economic institutions always lead to economic success as their entire outlook is to ensure that everybody has the opportunity to benefit and participate. Those with extractive institutions are there to benefit only a few and to take from the majority of the population. If you were living in North Korea and knew if you built a company like Apple, all your money would be taken and given to the ruling family, why would you bother to try and build that business. Only a few stand to benefit from the system and so there is a limit on how much can be both created and taken. Whereas, if you could also accumulate wealth, and so could all of the employees working for you, then its natural for everyone to actually put in the effort as you will reap the reward and everyone grows wealthy together.
Inclusive institutions create virtuous cycles
It’s not a fluke that when inclusive institutions are put in place, the result is inclusive economic reform. That’s because inclusive institutions not only stimulate economic growth; they also effectively reinforce themselves over time. If you take England as an example as the home of the Industrial Revolutions. As England’s political institutions became more pluralistic, it was in the interest of each powerful faction to ensure that every other faction’s power was circumscribed by law. Going all the way back to the Magna Carta in the 1200s there has been a consistent extension of rights to other groups. First the landed elite were given opportunity and a chance to participate all the way through to suffrage will enabled all men and women to participate equally. This means more and more groups were able to participate within the economy consistently building more and more wealth within the nation. It becomes self-fulfilling because once a nation agrees to give another group opportunity to participate, then it will always roll on to the next group. So first it was landowners, then it was factory owners, then it was the workers etc. Its hard to say no to the next group, when your group was given the same opportunity. The system would not allow it. The opposite of course is also true. If you have a history of blocking other groups from participating, the system reinforces that only those within the existing group should benefit and so other groups are excluded.
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