Are some countries determined to be poor? Are their trajectories set in stone? Are rich countries destined to always prosper?
Definitely not. But for the past 150-200 years or so, roughly the same countries have remained poor in terms of GDP. In fact, if we were to divide the world into rich and poor countries using a GDP above 20 000 USD as an indicator, only a few countries would belong in that rich elite group. Among these countries are the United States of America, Canada, Australia, and parts of western Europe, including Finland. Only a few additions have been made to the list after the beginning of the 20th century.
How these countries made it has been a subject of research for as long as we know. Various theories have been posed about why poor countries stay poor and rich countries are rich, including:
- The geography theory, backed up names such as Charles-Louis Montesquie, Jeffrey Sachs and Jared Diamond. The reasoning goes that people in the tropics are inherently lazy and lack innovativeness (Montesquie), countries in the tropics are disease-prone and soils are not productive (Sachs), or countries in certain regions had the unfavorable fate of having less productive plant and animal species available for domestication (Diamond).
- The culture theory, backed up by Max Weber. According to this theory the spirit of capitalism and the rise of the modern, industrial society is the result to a protestant ethic, a quality lacking from Africa, for instance – a place where old traditions and poor working morals prevail. (Hello all racists out there!)
- The ignorance theory, backed up by Lionel Robbins. This theory builds on a notion that poor countries remain poor because they do not do enough to correct market failures. They do not take measures that allow the thriving of a market economy, that is the situation where all individuals and companies can freely produce, buy and sell the products and services they need.
But what if all these theories are wrong? If the geography theory works, what then explains the poverty of North Korea and the prosperity of South Korea? Or what about the differences between the former Berlins? Was east Berlin geographically so fundamentally different from west Berlin? Can we honestly state that some countries, as a whole, are ‘lazier’ than others? Or when speaking of market failures, what if leaders of poor countries fail to take these measures on purpose?
The authors of Why Nations Fail offer an alternative theory. They state that world inequality and poverty exists today not because countries are situated in different locations, because their people are lazy or because people lack knowledge. It exists because countries are divided into those that have extractive economies and those that have inclusive economies.
In extractive economies a narrow elite extracts incomes and wealth from one subset of society to benefit a different subset. Characteristic of these economies are the narrow concentration of political power into the hands of a small elite who then have few incentives to do what they are supposed to do: provide basic public services and for example secure property rights. Their main interest is to sustain their own power.
Inclusive economies are those that create a level playing field for its citizens, enforce property rights and encourage investments in new technologies and skills. In these economies political power is distributed and a certain amount of law and order exists due to political centralization.
How a country then starts hosting either extractive or inclusive institutions is a combination of small differences, history and critical junctures. History is critical, particularly in the African countries, where many authoritarian systems have been inherited from colonial times. Small differences, such as having a system of including representatives of all levels of a community in decision-making situations, can add up through the course of time. Critical junctures are pivotal times in history during which the status quo is dramatically altered and major changes take place. For example the industrial revolution that commenced in England in the 18th century was a critical juncture for the whole world.
Those who benefited from the technologies provided by the industrial revolution embarked on a path of growing prosperity. Some resisted the new technologies. Technological change is often feared as it means, and has meant, replacing the old with the new. This is the process of creative destruction, a term coined by Joseph Schumpeter. Replacing the old with the new extends to the economic privileges and political power of certain people. With creative destruction inevitably comes redistribution of power, which is a prerequisite for prosperity.
Opponents of this theory will argue that growth has happened in other sorts of environments than just the inclusive economies mentioned earlier. Look at the examples of Ethiopia or China. The authors of Why Nations Fail argue, however, that growth in societies that are not fully inclusive (they “fail to provide incentives for economic activity, extract resources to benefit only a few, fail to protect property rights”) is never sustained.
There are mainly two reasons for this: Firstly, sustained growth requires innovation and for innovation to happen, societies need to create space for creative destruction, hence also destruction of established political power relations. Secondly, in extractive societies power is held by a small elite and this is always a security issue. There are always other forces who would be willing to take that spot of the elite.
Yes, for every elite that is misusing power there is always somebody out there who would like to take their place. This point is important to understand as it reminds us that even revolutions, such as the one in Egypt, do not mean that old systems are immediately replaced with inclusive, new ones. It is an event too frequent in history that one extractive elite is replaced by the other. This is the so called iron law of oligarchy. The love of power is very different from the power of love!
But history is not set in stone. Small changes, in interplay with critical junctures, can lead to change. Those changes are never smooth and straightforward. But what history has taught us is that these changes have been most efficient when they have been backed up and demanded by a large group of people from all sectors of society, including the lower, middle and upper class.
No theories are perfect and few can be applied universally. But this one at least shoots down the sort of thinking that merely circumstances or qualities of people are valid reasons for poverty or prosperity. We Europeans are not rich because we are superior people. African countries are not poor because they are lazy. It is a much broader picture, or web, of factors that lead countries to fail or to prosper.
One particular quote from Why Nations Fail echoed in me, as it seems applicable for both poor and rich countries today.
“But the elite, especially when their political power is threatened, form a more formidable barrier to innovation (than workers who might lose their jobs). The fact that they have much to lose from creative destruction means not only that they will not be the ones introducing new innovations but also that they will often resist and try to stop such innovations. Thus society needs newcomers to introduce the most radical innovations.”
In poor countries this speaks to the authoritarian leaders who nonchalantly elect themselves election after election despite a growing inequality in their countries.
In rich countries it speaks to a growing phenomenon of inwardness, and to the power of gigantic multinational corporations over emerging technologies, in particular in the energy sector.
Finally, radical innovations are often technologies, but also new ways of doing things and organizing ourselves. But in my opinion also values can be radical. Sincerity, kindness, gratitude, human dignity – these should all be enlisted as qualities/criteria of successful nations; past, present or future.