Modern day prosperity is
a very intriguing subject. The world
today has tremendous inequality in that human beings in different nations of
the world have completely different standards of life. People in some part of the world have reached
the moon, while people in the different location struggle to get two meals a
day. Geographical areas that were separated by mass of water, by lay of land or
by an imaginary political border had different resources to use, culture and
political system to follow which accounts for different rate of economic growth
and for a country’s position in terms of development. Institutions, culture, geography, resources
and impact of colonization are important determinants of modern day prosperity (The School of
Life, 2014) .
The importance of good institutions is placed above all other factors for the
prosperity of a country.
Authors of literature in
this field of study agree on causes of modern day prosperity or deprivation. No
scholars disagree that poor countries are poor because of their poor geography,
poor institutions, the scanty amount of resources of economic values and
economic policies. However, there is a debate on what factor is of highest
importance in determining the prosperity of the country. Similarly, scholars do
not have a unanimous opinion about the ways in helping to bring poor people out
of it.We will explore the importance of geography, institution and industrialization in this article. Let us first start with the importance of geography in prosperity.
All the landlocked
countries in Africa and Asia are developing countries. Landlocked countries
have a disadvantage because they have to spend around thirty to fifty percent
extra in raw or manufactured goods including oil than non-landlocked countries have to spend (Sidaway, 2011) . This fact proves
that landlocked countries will have a comparative disadvantage in trading with
other countries. A research by (Paudel, 2012) reveals woes of landlocked countries–
the conclusion of which was that, all else being equal, landlocked countries
experience economic growth of six percent less than that of non-landlocked countries. (Banjaree & Duflo, 2011) in their book Poor Economics quote Jeffrey Sachs, an
advisor to the United Nations, in mentioning that “countries are poor because
they are hot, infertile, or often landlocked” which impedes their productivity and [economic growth] (p.3).
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The second explanation
for prosperity is given from institutional perspective- that of extractive and
inclusive institutions. Extractive institutions are meant to benefit the
selected few by extracting from many, and these institutions are unable to
provide incentives for growth which may lead to stagnation and poverty.
Inclusive institutions, on the other hand, distribute power in a pluralistic
manner, achieve some amount of political centralization, enact rules of law,
provide property rights and encourage investment in new technologies and skills
which are conducive to economic growth (Robinson & Acemoglu, 2013) . Some scholars- prominent of
which are Acemoglu and Robinson-assert that inclusive economic and political
institutions are very important because economic growth and prosperity are
associated with inclusive political and economic institutions. They claim that
geography and resources alone cannot determine prosperity of the country, but
it is upon economic and political institutions of the country which leads the
country into greater economic growth. The United States being
richer today than geographically well suited and resource rich Mexico or Peru (Ibid, p. 42), the contrast of economic
development of South and North Korea (Ibid, p.
75) and rapid economic development of countries such as Singapore,
Malaysia and Botswana despite having a very hot climate (Ibid, p.49) are
arguments in favor of institutions over geography and economic resources.
Policies a country adopts
are also an important constituent of economic growth of the country. Good policies
emerge with inclusive elements in politics; conversely good policies cannot be
formulated and corruption will be in rife without pluralistic elements in
politics (Banjaree & Duflo, 2011, pp.
235-265) .
Good policies, in turn, can also help break the vicious cycle of low economic
growth by paving a way for creative destruction, technological advancement, and
higher revenue collection, investments in the country and boarder participation
of individual in the policy making process.
Unlike Achemoglu and Robinson,
who advocate for good institutions, Erik Reinert in his book How Rich Countries Got Rich and Why Poor Countries Stay Poor
shows that the technology and mass production of industry are more important
than capital, property rights or the rule of law to economic growth. He writes in his book that “economic growth is
the synergy of a large division of labor, increasing returns, [diversified
economy] and new knowledge” and that “creating and protecting industry is
creating and protecting democracy” (Reinert, 2009, p. 76) . Industrialization
is the result of new knowledge, while increasing returns the result of it.
Most of the work was
driven by muscle power in the seventeenth century. When people had started to
believe that all that could be achieved was through human muscles,
industrialization completely changed the outlook of the world.
Industrialization, unarguably, is the major component of modern day prosperity,
and inequality is the consequence of no or different rate of economic progress.
Industrial Revolution leveraged the economic growth to lead billions of people
into modern day prosperity (Deaton, 2013, p. 4) . Proliferation of the manufacturing
sector with industrialization paved the way for the economic principle of increasing returns ,which
means a decrease in the cost per unit because of an increase in production,
breaking the vicious circle of economic principle of diminishing returns ,which
means an increase in the cost of production due to an increase in one variable
of output (Reinert, 2009, p. 74) . Through
industrialization, England, followed by the rest of Europe, North America, and
some Asian countries embraced higher efficiency and productivity in
manufacturing sector, leaving the rest of the world behind -which has created a
huge gap between the western countries and the rest of the world that is
increasing even to this date (Deaton, 2013) .
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The question we are faced
to ask is why some countries abstain from inheriting new knowledge or new technology,
which Reinert proposes as the factors of development. The answer again lies in
the types of institutions. While inclusive political institutions in England
laid the framework for inclusive economic institutions that would start the
first industrial revolution, it has still not spread to Africa because the
continent has experienced negative “vicious loop of the persistence and re-creation
of extractive political institutions” which shield creative destruction in fear
of losing political and economic control. For this reason, industrialization in
African and other developing countries were not possible “either because the
country was under an absolutist regime or because the country lacked or had a
weak political centralization” (Robinson & Acemoglu, 2013) .
Economic and political
freedom are as important aspects of development as sound economic and political institutions, for
freedom ensures that an individual pursues economic activities independently on
his/her rational interest to trigger the causes of development. Amatya Sen describes development as the
“removal of substantial un-freedoms” such that aspects such as “economic
opportunities, political freedoms, social facilities, transparency, and
protective security” are guaranteed to an individual to pursue economic
activities of his/her choice to be an agent of development (Sen, 1999) . Similarly,
French Statesman and political writer Alexis de Tocqueville in 1855 -in seeing
consolidating civilization, manufacturing sector and democracy in Europe- in line
with what, Amatya Sen would imply in 1999, said: “I
do not know if one can cite a single manufacturing and commercial nation from
the Tyrains to the Florentines and the English that has not also been free. Therefore,
a close tie and a necessary relation exist between those two things: freedom
and industry (Reinert, 2009, p. 87) .”
I had earlier mentioned in the article in earlier posts that inclusive institutions and economic freedom lead countries towards greater economic prosperity. Against this argument, I would like to ditto information from last post of Kazakhstan. Resource rich countries such as Russia, Iran, Saudi Arabia or Venezuela have achieved satisfactory economic progress in spite of what we would earlier describe as extractive institutions and restricted economies. This phenomenon has led Thomas L. Friedman to devise the first law of Petro politics, which states that democracy and oil- an important economic resource or perhaps the most important- do not mix (Friedman,
2006) .
Other research suggests that oil wealth impedes the democratic transformation in
authoritarian states and that “oil wealth lengthens the tenure of authoritarian
rulers, although this result is somewhat fragile” (Ross, 2008). Moreover, “Gabon, Russia, Saudi Arabia and
Venezuela are unlikely to lead to a fundamental transformation of these
authoritarian regimes towards inclusive institutions, for growth is generated
by the increase in the value of the natural resources of respective nation” (Robinson & Acemoglu, 2013, p. 445) .
I had earlier mentioned in the article in earlier posts that inclusive institutions and economic freedom lead countries towards greater economic prosperity. Against this argument, I would like to ditto information from last post of Kazakhstan. Resource rich countries such as Russia, Iran, Saudi Arabia or Venezuela have achieved satisfactory economic progress in spite of what we would earlier describe as extractive institutions and restricted economies. This phenomenon has led Thomas L. Friedman to devise the first law of Petro politics, which states that democracy and oil- an important economic resource or perhaps the most important- do not mix
Though it is not in the scope of the article to delve into detailed analysis of economic theories and policies, there is an interesting perspective set forth by Reinert. He counterintuitively sees being poor in natural resources as one of the opportunity to become rich. In his theory, a poor country has to imports raw products and export industrial products which helps country to avoid diminishing returns
I will explore more on this topic in upcoming posts.
References:
Banjaree, A., & Duflo,
E. (2011). Poor Economics . New York: Public Affairs in Papers.
Deaton, A. (2013). The
Great Escape . Princeton and Oxford: Princeton University Press.
Easterly, W. (2001). The
Elusive Quest for Growth. Cambridge and London: The MIT Press.
Friedman, T. L. (2006, May
1). The first law of petropolitics. Retrieved from Foreign Policy:
http://www.foreignpolicy.com/articles/2006/04/25/the_first_law_of_petropolitics
Reinert, E. (2009). How
Rich Countries Got Rich and Why Poor Countries Stay Poor. New York:
Public Affairs in Paper.
Robinson, A. J., &
Acemoglu, D. (2013). Why Nations Fail. New York: Public Affairs in
Papers.
Rodrik, D. (2003). In
search of Prosperity. Princeton and Oxford: Princeton University Press.
Sen, A. (1999). Development
as Freedom. Retrieved from New York Times:
https://www.nytimes.com/books/first/s/sen-development.html
Sidaway, R. (2011). Land
Locked Countries. Retrieved from British Council:
https://learnenglish.britishcouncil.org/en/magazine-articles/land-locked-countries
The School of Life. (2014, November 24). Retrieved from You Tube:
https://www.youtube.com/watch?v=9-4V3HR696k&list=PLwxNMb28XmpehnfQOa4c0E7j3GIj4qFEj
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