The three winners of this year’s Nobel in Economics have two eminently readable books to their credit: Why Nations Fail? (2012) and The Narrow Corridor (2019). The Committee has chosen to pick up the ideas encapsulated in their work of 2012, to demonstrate how those societies with poor rule of law and institutions exploit the population and do not generate growth or change for the better.
The book is an indirect polemic against theories explaining global inequality: the geographical theory of Jeffrey Sachs, the theory of ignorance of the elites of Banerjee and Duflo, and Max Weber about the influence of protestant ethic on economic development. They distinguish institutions as being either extractive or inclusive. Inclusive societies protect property rights, do not allow unjust property alienation, and integrate workers to increase labour productivity. Inclusive political institutions allow wide sections of society to govern the country and make decisions that benefit the majority.
These institutions are the foundations of all modern liberal societies.
The extractive institutions exclude large segments of society from the distribution of income from their activities. Elections in the country do preclude the existence of extractive institutions — if competition is dishonest and voting is done with numerous violations it will be so. Harking back to the history of colonialism, the authors bring out how European colonies had a dramatic and divergent impact across the world, depending on whether the coloniser focused on the extraction of resources or the setting up of long-term institutions for the benefit of European migrants.
Drain theory
This resulted in a reversal of fortune, where former colonies that were once rich became poor (as in the case of India demonstrated in Dadabhai Naoroji’s Drain theory), while some poor countries with the help of institutions were able to garner some generalised level of prosperity.
Francis Fukuyama believes that Why Do Nations Fail? oversimplifies the issue by lumping different institutions and making flawed comparisons between societies. Jeffrey Sachs believes that the book focuses too narrowly on domestic political institutions and ignores other factors such as technological progress and geopolitics. Singapore and South Korea easily refute Acemoglu’s argument that democratic political institutions are a prerequisite for economic growth. Hong Kong, Korea, Taiwan and Singapore are prime examples of countries that have high growth, with policies tending towards exclusiveness.
Under the best of conditions, growth does not sustain itself. The great economic depression of the 1930s or the global financial crisis in 2007-08 did not happen because of a decline in inclusiveness. The incredible economic transition in China post-1980 happened because of their embracing capitalist economy, respecting private property, and massive investment in infrastructure and education.
Acemoglu told reporters recently that data collected by Freedom House and V-Dem show that public institutions everywhere are getting weaker and support for democracy is at an all-time low. They admit that China is a bit of a challenge to analyse.
Countries like China and Russia with strong state apparatuses but inadequate checks on their power suffer from inequality, lack of innovation, and a general lack of human rights. On the other hand, in the US the power and capacity of the state is extensive and capable but restrained by guaranteed rights and democratic participation. In the context of India, Acemoglu highlights how corruption and caste-based inequality contribute to its poor economic institution. Of late the independence of constitutional bodies is also being questioned. This year’s Nobel in Economics has salience both for ushering greater inclusiveness and ensuring the independence of India’s institutions.
The writer is Professor Emeritus, Kiit University, Bhubaneshwar