Why Nations Fail

tlp magazine

A “Why Nations Fail” Summary

Thank you very much. I am James Robinson. I am going to talk about why nations fail and why nations succeed as well, which is really about why some countries are poor and some countries are prosperous. It turns out you can tell a lot about the answers to that question by looking at the Korean peninsula at night. If you look at Korean peninsula at night, you see some obvious things. That South Korea has a lot of light, electricity. North Korea, on the other hand, is rather dark. There you can see a spot of light. That’s probably the presidential palace in Pyongyang. (Laughter) Now, there could be different reasons why North Korea is very dark at night. It could be that North Koreans have electricity and light bulbs, but they just think candles are more romantic.(Laughter) It could be, on the other hand, that North Koreans have electricity and light bulbs, but they are just trying to reduce their carbon footprint. I think, however, the more plausible explanation is that actually North Koreans don’t have access to the types of technologies like electricity and power and light bulbs that South Koreans do. And that enormously restricts their economic potential. So one thing we know about the difference between poor countries and rich countries is that poor countries, like North Korea, tend to have much worse technology than rich countries. Let me tell you about some other things we know about the differences between poor countries and rich countries. Poor countries have much less educated people. They tend to have much less healthy people. They live shorter lives. They have much worse government services, like infrastructure. So, here is an idyllic Congolese driving scene in a part of the world where I do a lot of research, the Democratic Republic of the Congo. This is what they call, somewhat ironically in the Congo, Interstate No 1. And you can see that driving on Interstate No. 1, you spend a lot of time digging your car out of sand and mud. This is the dry season. If it was the rainy season, forget it. You are not going anywhere. So poor countries have much worse infrastructure public services. So why is it that poor and rich countries differ in terms of their public services, their technologies, their levels of education? Well, some people think that it’s just that poor countries are too poor to afford to build roads, or too poor to use modern technologies like electricity and light bulbs – not that modern, really, if you think about it. But anyway, they’re too poor to use it. But I didn’t think that’s right. Most of poor counties where I do research, lots of resources that could be used for these things are wasted. Now, here is an example of that. You may know this gentleman. He is called Robert Mugabe. He is the president of Zimbabwe. He has been president for 34 years. You think, you probably known him as a good politician. What you didn’t know is he’s also a remarkably lucky man. In fact, he won the lottery. So how about that? Someone who is a great politician and he also wins the lottery. I mean, come on. Does Greece have politicians like that? I mean, Britain doesn’t. So, he is a lucky guy, and I am thinking, I am sort of trying to suggest that this may not be completely coincidental that he happens to have been president for 34 years and he also in his spare time wins the lottery. (Laughter) That road, by the way, I showed you in 2010 in the Congo, in 1960 that was a nice tarmaced surfaced road that has since deteriorated into the bush. So I don’t think the real reason that poor countries are poor and prosperous countries are prosperous is that poor countries just cannot afford to do the sorts of things necessary to become rich. I think the explanation is, and that is what I am going to argue in the rest of my presentation, that poor countries and rich countries are organized in very different ways. And that organization in rich countries creates incentives and opportunities for people, and in poor countries, it doesn’t. In fact, most poor countries are organized in ways which block people’s incentives and block people’s opportunities. And that’s what creates poverty. So let me give you a very specific example of that which I’ve realized it is sort of the theme, you know, it’s almost the motif of the whole event, which is the light bulb. I was only expecting to connect this to North and South Korea, but there we had all these light bulbs and Shakespeare that started the day. So what is this? This is a patent. It was taken out by Thomas Edison in 1880, who invented the light bulb. So Edison had an invention. And what did he do? He took out a patent. The patent protected his intellectual property rights. It stopped people from copying his idea. And that created incentives for people to innovate. So, that was a very important stimulus for innovation in 19th century U.S. Let me tell you a few other things about the patent system. The patent system was actually set up by the US constitution. The first patent law’s in 1790, and Thomas Jefferson, not Thomas Edison, one of the founding fathers of the United States, was actually on the first patent board handing out patents. The system was open to everybody. So, it didn’t matter who you were, you could pay the same fee, you got a patent, and the government protected your intellectual property rights, OK? Now, that’s absolutely crucial because we know as economists that one of the huge differences between poor and rich countries is exactly innovation, exactly technological change. It’s that new technologies that don’t spread from South Korea to North Korea. So, here’s an example of would call an economic institution, a kind of rule that creates incentives and opportunities in society, and this institution has a particular property which I’m going to call inclusive. It’s inclusive in a particular and important way because if you look at who are these people who are filing patents? You know, Thomas Edison. Who? What were their social backgrounds? Well, it turns out, they came from all over society. Poor people, rich people, elite, non-elite, farmers, artists, professional people, educated people, non-educated people. Talent, ideas, skill, creativity, entrepreneurship are spread very broadly in society. And if you want to have a prosperous society, you need to have a set of institutions that can harness all that latent talent in society. That’s what inclusive institutions are about, and that’s exactly how the patent system worked. Countries like Zimbabwe, or Democratic Republic of Kongo, or North Korea, which are poor, have economic institutions that create very different incentives and opportunities than inclusive economic institutions like the patent system. To illustrate that in a richer way, let me bring time from 1880 right up today, and talk about why the United States is richer than Mexico, just across the border. I’m going to do that in a very particular context. I’m going get you think about the two richest men in the world, Bill Gates and Carlos Slim. Bill Gates from United States of America, Carlos Slim from Mexico. What’s really interesting about the comparison is the way those people made their money. Bill Gates was an entrepreneur. He set up a company when he was a Harvard undergraduate. He made a fortune through innovation in the computer software industry. Carlos Slim, on the other hand, made a fortune through creating monopolies, and through owning a monopoly, a telecommunications monopoly. According to the Organization of Economic Cooperation and Development, Carlos Slim’s monopoly created an enormous amount of wealth for him, reduces national income in Mexico by about 2% a year, for the period of 2005 to 2009 it actually reduced income in Mexico by 130 billion dollars. So, in the United States, Bill Gates responded to the inclusive nature of institutions, creating incentives, creating opportunities. What happened? He generated innovation, he generated new ideas, and that created wealth for him, it created a vast amount of wealth for society. What happened in Mexico was something very different. The way to create wealth was not through innovation, but through creating monopolies. Monopolies block other people’s opportunities, and they block other people’s incentives. Extractive institutions is what I’m going to call the opposite of inclusive. I gave the patent system as an example of an inclusive economic institution. Let me say that there is something else,
and that’s what’s going on in Mexico, in North Korea, and Zimbabwe. I’m going to call that extractive economic institutions. Rules in society that impede incentives and opportunities. So, that’s the difference between poor and rich countries, in a nutshell. But now, let’s go one layer back in the onion
and ask, “OK, fine. So how come the United States ended up like that?” or “How come Mexico is like that?”
and “Why is Zimbabwe like that?” The example of president Mugabe winning the lottary is perhaps meant to plant a seed in your mind. And so now, I’d like the seed to sort of grow a little. But I’m not going to grow it in Zimbabwe. Let me go back to the United States and back to the patent system, back in 1790, when Thomas Jefferson was on the patent board, and get you to think, “OK, so how come they ended up with this patent system like this? What was the secret?” And I think there were two secrets, and they are very political. So, ultimately, I think what matters for economic prosperity, for success and failure, is inclusive and extractive economic institutions. But lying behind that is politics. And I want to emphasize two dimensions of politics. One is, how did you end up in the United States with this patent law that treated everybody equally, that gave everybody equal access to patenting on the same terms. That was because in the United States in the late 18th century, political power was sufficiently broadly distributed in society, but you couldn’t have some oligarchive patent system. You couldn’t have a patent system where Thomas Jefferson could decide, “Mmm, maybe you get a patent, and maybe you don’t. Maybe I’ll give you a patent, but I don’t like your face. You’re not getting a patent.” That wasn’t possible, given how democratic US society was at that time. So, one thing which is important about creating these inclusive institutions was the distribution of political power in society. The broad distribution of political power. The other thing was important, was at that time, the United States had a strong state that could enforce the patent. It wasn’t just a matter of passing the law, it was enforcing the law. The state would come, and they would protect your intellectual property rights. So, these two things are very important. So let me bring that to the present and show you a photograph of Bill Gates in Washington DC. Now, what is he doing here? He’s giving testimony to the US anti-trust authority. Here’s the strong US state in action. Both of these elements that I talked about, the distribution of power and the strength of the state are crucial for understanding the difference between Bill Gates and Carlos Slim. How did Carlos Slim get his monopolies? It was a one-party state, the PRI, the one-party state, which had been in power since the late 1920s, in the 1990s, privatized a monopoly to Carlos Slim. Mexico has very nice anti-trust laws. But it’s inconceivable that Carlos Slim would have to do what Bill Gates did, which was to come and, you know, “I swear to tell the truth, the whole truth and nothing but the truth,” in front of anti-trust authorities in Washington DC. So, this is the power of the state. And if you think about both of these examples, both of these elements come in. The fact that Carlos Slim could create his monopolies because political power was not broadly distributed in Mexico, and the anti-trust laws that exist in Mexico cannot be enforced, because the state is too weak to enforce them.In the United States it’s inconceivable that you could have such a monopolization of industry, and the state is capable of enforcing the law. And in fact, anti-trust laws are a fascinating example. If you go back to a hundred years before this. This is the octopus of the Standard Oil Company. The Standard Oil Company was run by John Rockefeller. It was an enormous attempt to build a monopoly in the United States. You can see here, it’s got its tentacles around the White House, it’s got its tentacles around the politicians, around Congress, it’s enveloping the political system with its wealth and connections. It was broken up by federal anti-trust authority. So, there’s a long battle against monopolies, against extractive institutions in an inclusive society. So, what about Greece? (Laughter) Let me say something about Greece. How does Greece fit into this? Well, of course, compared to Zimbabwe, or the Democratic Republic of the Congo, or Haiti, or North Korea, Greece is an enormous success. Greece has been enormously successful, economically, in the past 100 years. It’s diversified its economy, it’s raised people’s living standards enormously, it’s broadened education, health, etc. But I think, the problems of Greece in the last decade stem from the problems of reconciling these two dimensions of politics that you need to create an inclusive society. Reconciling, building an effective strong modern state with having a democracy where political power is broadly distributed. Now, when I talked about the United States you might have been thinking, “Gosh, these things smoothly come into place, you have one thing, you have the other. You want to have a broad distribution of power that makes the state accountable. You want to have a strong state because that makes democracy effective. You can enforce the rules, but I think the more you look, and the more you think, you see that actually in many contexts these two dimensions are difficult to reconcile. They sometimes have an enormous contradictory feature. And I think that’s part of the problem in Greece, particularly since the redemocratization in 1974, is that Greek society has found it difficult to reconcile building an effective central state based on rules. Remember my example of the patent system, how crucial it was that this was a rule, the patent system applied to everyone, the same rules applied to everyone. That’s what generated these incentives and opportunities. If Thomas Jefferson had been handing out patents to people on the basis, “Hey, I want to be president, so if you support me, let’s start building a coalition, then you get your patent.” “I don’t like your face. You don’t look like you’re going to be on my team. You’re not going to get a patent.” If that had been how the US patent system worked, then it would not have the incentive effects, the effects on innovation and economic development, that it did have. And I think that once you think about it, you can see that when you increase political power, when you create political power broadly in society, that can create pressures to undermine the functionality of the state. To undermine the strong state. To make the state become a tool of the political struggle rather than a neutral arbiter of new rules and universal principles. And I would say, that’s the root cause of a lot of the problems, from my perspective, in Greece. Trying to make the state work properly, to enforce rules, to not be clientalistic, to enforce universal principles. And a lot of the economics stems from that. The way I’m talking now is sort of politics. Politics, it’s about politics. Economics is crucial. But economic institutions and economic incentives and opportunities are embedded in a political society. And they stem from a political process. And I think that’s being the problem in Greece. Think about the deficit or the fiscal problem. Why has that happened? That didn’t happen for some technical reason. It didn’t happen because Greek governments had the wrong economic advisors. It happened because of this problem of reconciling democracy with creating a strong state. If the state becomes a tool for serving private interestsand not public interests, serving individuals and not following the collective welfare in society, then of course you’re going to have terrible fiscal policy and unsustainable debt problems. Stable macroeconomic policies are public good, but if the state become clientalized, it’s not about providing public good. It’s about providing private goods. So who’s internalizing the debt or the deficit? Nobody. So, that’s a natural context to get unsustainable fiscal policy. So what’s the solution to this? Not fiscal austerity. Fiscal austerity might be necessary to keep the Germans happy, but you’re treating the symptoms, not the cause. The cause is political. The solution to the problem is to find a way of reconciling these two elements to build inclusive political institutions. And where does that come from? That’s a political project. That’a about organizing people collectively. Clientelism is always individually rational, it’s just not collectively rational for society. So, you have to build a project. Politicians have to build a project to build the state, to build a non-clientelistic state, to reform the interface between state and society in Greece. And if you ask me, am I optimistic or pessimistic about Greece, then I’d start looking at the politics, and I’d start looking at civil society and ask, “Who has that project? Where is it?” (Applause) Thank you. (Applause)

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