You Decide: Why do some nations succeed and others fail?

By Dr. Mike Walden | Mar 04, 2013

I have always been fascinated by geography. As a young child, I used
to draw maps for fun. I considered a career as a geographer or
cartographer before turning to economics. But even as an economist,
I’ve tried to work geography into my research and writings. For
example, I’ve investigated how certain prices and salaries vary across
states, and I’ve studied the regional economies within North Carolina.

For economists who are also interested in geography — like me — one
of the long-standing, perplexing questions has been why nations around
the world don’t improve, economically speaking, at the same rate. That
is, as we look at nations over long periods of time, it’s clear that
all don’t boost their standard of living at the same rate. Some --
like those countries in North America and Western Europe — have
achieved living standards much higher than nations in other regions,
such as in Asia, Africa and even South America.

A logical explanation for differing economic results might be natural
resources. We might expect countries with abundant natural resources
(oil, gas, precious metals) to have successful economies for two
reasons. First, the countries can use the resources to propel their
own growth. And second, the resources can be easily sold to countries
lacking them for big bucks!

Yet the natural resources explanation has problems. There are many
countries around the world — in the Middle East, Asia and even South
America — that have huge supplies of natural resources and have
relatively low living standards. Similarly, there are countries with
few natural resources — Japan and Singapore are good examples — that
have achieved very high incomes.

Maybe education is the key. Could it be the case that countries with
higher levels of education will achieve better employment and incomes
for their workers than countries with less education?

Again, there doesn’t appear to be a one-to-one correspondence. Sure,
there are plenty of countries with low literacy rates that are poor
and with high literacy rates that are rich. But there are also
countries that have struggled economically with a highly educated
population.

So what’s the answer for long-run economic prosperity? What factor or
factors will, more than any others, give a nation the best chance of
moving up the economic ladder over time?

This simple yet extremely important question was the central topic of
a book published last year that I just finished reading. I have to say
it is one of the best and most influential books I’ve read in years.
It has the simple title Why Nations Fail, and it was written by MIT
economist Daron Acemoglu and Harvard political scientist James
Robinson.

Acemoglu and Robinson agree that plentiful natural resources and an
educated workforce can lead to fast economic growth. But these aren’t
enough, especially for sustained growth over time when the resources
eventually run out.

Instead, the authors argue that two political and legal institutions
are crucial in dividing nations between the winners and the losers in
the economic race. Politically, nations must be inclusive and also
open to competition and change. Individuals must know they can
participate in both the political and economic systems and go as far
as their abilities and interests will take them. Knowing this and
knowing they will be rewarded for their performance will motivate
people to develop their skills and aptitudes and in the process propel
the economy forward.

Successful countries are those embracing competition and change. Being
supportive of the latest technologies, innovations and products allows
countries to adapt and improve over time. But, the authors caution,
doing so isn’t always easy or without conflict. Out with the old and
in with the new means those attached to the old will lose, at least
temporarily. Managing economic change can be one of the tallest
challenges facing a country. We’ve seen this challenge first hand in
our country in the last quarter century.

Last, successful countries have legal institutions protecting
ownership and enforcing contracts. While some may call such
protections selfish, others say the legal frameworks guarantee that
those doing the work reap the benefits, and this motivates striving,
commitment and accomplishment. Still, the institutions can also
support collective action to create social safety net programs and
widespread economic opportunity. Successful nations are able to make
private promotion and public protections compatible.

Acemoglu and Robinson make their case using the sweep of both time and
geography. Whether or not you agree with all their conclusions, Why
Nations Fail is a masterful book that will help you decide the answers
to an age-old question. Enjoy!

Dr. Mike Walden is a William Neal Reynolds Professor and North
Carolina Cooperative Extension economist in the Department of
Agricultural and Resource Economics of N.C. State University’s College
of Agriculture and Life Sciences. He teaches and writes on personal
finance, economic outlook and public policy. The College of
Agriculture and Life Sciences communications unit provides his You
Decide column every two weeks. Previous columns are available at
http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide.

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