Why nations fail or prosper
BREAKTHROUGH - Elfren S. Cruz (The Philippine Star) - September 5, 2015 - 10:00am

Why are some nations rich and others poor, divided by wealth and poverty, health and sickness, food and famine? Is there a template that the Philippines can adopt to eliminate poverty and ensure equal opportunity for all people?

While there is no single formula for any country, I have started rereading  a book published in 2012: WHY NATIONS FAIL: The Origins of Power, Prosperity and Poverty by Darong Acemoglu and James Robinson. Back in 2012, the authors predicted in their book “...China under the rule of the Communist Party is another example of a society experiencing growth under extractive institutions and is similarly unlikely to generate sustained growth unless it undergoes a fundamental political transformation toward inclusive political institutions.”

The book’s major thesis is that inclusive economic institutions are the major engines of growth and prosperity. However, society, through its leaders, determines the types of economic institutions that will dominate its economy. Then it adds that politics is the process by which a society chooses the rules that will govern it including the leaders who will govern the nation.

The book illustrates the critical stakes in the 2016 elections when the Philippines will choose its next leaders.

Inclusive economic institutions

Inclusive economic institutions, such as those in the United States, Japan and Australia are those “that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and enable individuals to make the choices they make.”

To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field.  It must also permit the entry of new businesses and allow people to choose their careers.

Naturally, a businessman who expects his output to be stolen, expropriated or entirely taxed away will have little incentive to work, let alone any incentive to undertake investments and innovation.

Among the biggest obstacles of inclusive economic institutions are crony capitalism; money laundering through legal institutions like banks and other so-called “wealth management” institutions; and, taxation corruption which allow rich people to pay a smaller percentage of their income for taxes compared to ordinary office workers.

“To function well, society also needs other public services, roads and a transport network so that good can be transported, a public infrastructure so that economic activity can flourish and some type of basic regulation to prevent fraud and malfeasance.”

The government is the enforcer of law and order, private property and contracts, and often the key provider of public services. Inclusive economic institutions need the state but the government must be also inclusive.

For example, the legal institutions like the Supreme Court can be the tool to prevent discrimination against the mass of the people and ensure equality before the law. But the Supreme Court can also be the tool to discriminate against the masses and ensure elitist justice. This is the controversy regarding the approval, by the Supreme Court, of the bail petition of Enrile.

Institutions which have opposite properties to inclusive institutions are called “extractive because such institutions are designed to extract income and wealth from one subset of society to benefit a different subset.

When taxes on the poor and middle class are increased or public services are minimized while the rich continue to evade taxes and money laundering is not curtailed, then the tax system is still extractive.

Inclusive Political Institutions

Politics is crucial for economic prosperity for the simple reason “...that while inclusive institutions may be good for the economic prosperity of a nation, some people or groups will be much better off by setting up institutions that are extractive. “

During the Marcos dictatorial regime, Benedicto was given monopoly of the sugar trade. This may enriched his family but the sugar industry practically collapsed and thousands of people became unemployed.

“When there is conflict over institutions, what happens depends on which people or group wins out in the game of politics – who can get more support, obtain additional resources, and form more effective alliances. In short, who wins depends on the distribution of political power in society.”

Enemies of prosperity and creative destruction

If inclusive economic and political institutions will lead to growth and prosperity, then why are there such strong opposition to creating those types of institutions?

The answer is that economic prosperity and growth creates both winners and losers. Opposition to economic growth and technological change, unfortunately, may seem logical to certain sectors.

For example, take radio commentators. A large segment of radio audiences are those riding in vehicles who will switch to television when they get home. It may sound weird, but traffic jams actually benefit radio commentators who have a “captive” audience for those hours before and after work. But this is an audience that need to be angry to listen to commentators who, therefore, must also convey righteous anger. If traffic jams disappear, car riders will have less listening time and will probably shift to listening to music instead of “angry” commentators.

Economic growth and technological change result in what economist Schumpeter called “creative” destruction wherein the old are replaced by the new. “New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete.”

Companies that rely on monopolies or tax evasion to be profitable will not be able to compete in an inclusive economic environment. It can be expected that beneficiaries of a level business playing field will push for a politics that ensures the rule of law and the dismantling of elitism in the economy.

 It can also be expected that politicians who rely on patronage politics and businessmen who fear “creative destruction” will form alliances to perpetuate a society with “extractive” economic and political institutions even if this results in preventing economic growth and prosperity for the country.

Education and technology

The two engines of prosperity which thrives in a society with inclusive economic and political institutions are technology and education. Economic growth can only be sustained by continuous technological improvements. This is linked to education of the workforce acquired in schools, at home or on the job.

Nations fail because “ they fail to create incentives for parents to educate their children and by political institutions that fail to induce the government to build, finance and support schools...the price these nations pay for low education of their population ...is high. ...they have many potential Bill Gates and perhaps one or two Albert Einsteins who are now working as poor, uneducated farmers, being coerced to do what they don’t want to do because they never had the opportunity to realize their vocation in life.”

Nations must encourage technological innovation, invest in people and mobilize the talents and skills of a large number of individuals in order to achieve economic growth and prosperity.

Daang Matuwid

During the past five years, the Philippines has changed its direction and started on the road towards a society with inclusive economic and political institutions. This is Daang Matuwid – the road to economic growth and prosperity; but, in the words of the poet Robert Frost, we still have “ many miles to go before we sleep.”

Where the Write Things Are’s Classes for Kids and Teens

Write Away! Weekend: Getting started on your comic book on September 26 (1-4pm) with popular cartoonist and writer Manix Abrera at the Canadian American School Alphaland Makati Place.

Young Writers’ Hangout every first Saturday of the month (1:30-3pm)at Fully Booked Bonifacio High Street.

For registration and fee details contact 0917-6240196 / writethingsph@gmail.com.

Email: elfrencruz@gmail.com


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