Economic Prosperity: Scholarly Perspectives

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).

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 (Reinert, 2009).

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