The fence that divides the city of Nogales is part of the natural
experiment in organizing human societies. North of the fence lies the
American city of Nogales, Arizona; south of it lies the Mexican city of
Nogales, Sonora. On the American side, average income and life expectancy
are higher, crime and corruption are lower, health and roads are better.
Yet the geographic environment is identical on both of the fence, and the
ethnic makeup of the human population is similar. The reasons for those
differences between the two Nogaleses are the differences between the
current political and economic institutions of the US and Mexico.
This example, which introduces *Why Nations Fail* by Daron Acemoglu and
James Robinson, illustrates on a small scale the book’s subject. Power,
prosperity and poverty vary greatly around the world. Norway, the world’s
richest country, is 496 times richer than Burundi, the world’s poorest
country. Why? That’s a central question of economics.
Different economists have different views about the relative importance of
the conditions and factors that make countries richer or poorer. The
factors they most discuss are so-called “good institutions”, which may be
defined as laws and practices that motivate people to work hard, become
economically productive, and thereby enrich themselves and their countries.
They are the basis of the Nogales anecdote, and the focus of *Why Nations
Fail*. In the authors’ words:
The reason that Nogales, Arizona, is much richer than Nogales, Sonora, is
simple: it is because of the very different institutions on the two sides
of the border, which create very different incentives for the inhabitants
of Nogales, Arizona, versus Nogales, Sonora.
Among the good economic institutions that motivate people to become
productive are the protection of their private property rights, predictable
enforcement of their contracts, opportunities to invest and retain control
of their money, control of inflation, and open exchange of currency. For
instance, people are motivated to work hard if they have opportunities to
invest their earnings profitably, but not if they have few such
opportunities or if their earnings or profits are likely to be confiscated.
The strongest evidence supporting this view comes from natural experiments
involving borders: i.e., division of a uniform environment and initially
uniform human population by a political border that eventually comes to
separate different economic and political institutions, which create
differences in wealth. Besides Nogales, examples include the contrasts
between North and South Korea and between the former East and West Germany.
Many or most economists, including Acemoglu and Robinson, generalize from
these examples of bordering countries and deduce that good institutions
also explain the differences in wealth between nations that aren’t
neighbors and that differ greatly in their geographic environments and
human populations.
There is no doubt that good institutions are important in determining a
country’s wealth. But why have some countries ended up with good
institutions, while others haven’t? The most important factor behind their
emergence is the historical duration of centralized government. Until the
rise of the world’s first states, beginning around 3400 BC, all human
societies were bands or tribes or chiefdoms, without any of the complex
economic institutions of governments. A long history of government doesn’t
guarantee good institutions but at least permits them; a short history
makes them very unlikely. One can’t just suddenly introduce government
institutions and expect people to adopt them and to unlearn their long
history of tribal organization.
That cruel reality underlines the tragedy of modern nations, such as Papua
New Guinea, whose societies were until recently tribal. Oil and mining
companies there pay royalties intended for local landowners through village
leaders, but the leaders often keep the royalties for themselves. That’s
because they have internalized their society’s practice by which clan
leaders pursue their personal interests on their own clan’s interests,
rather than representing everyone’s interests.
The various durations of government around the world are linked to the
various durations and productivities of farming that was the prerequisite
for the rise of governments. For example, Europe began to acquire highly
productive agriculture 9,000 years ago and state government by at least
4,000 years ago, but subequatorial Africa acquired less productive
agriculture only between 2,000 and 1,800 years ago and state government
even more recently. Those historical differences prove to have huge effects
on the modern distribution of wealth. Ola Olsson and Douglas Hibbs showed
that, on average, nations in which agriculture arose many millennia
ago-e.g., European nations-tend to be richer today than nations with a
shorter history of agriculture (e.g., subequatorial African nations), and
that this factor explains about half of all the modern national variation
in wealth. Valerie Bockstette, Areendam Chanda, and Louis Putterman showed
further that, if one compares countries that were equally poor fifty years
ago (e.g., South Korea and Ghana), the countries with a long history of
state government (e.g., South Korea) have on the average been getting rich
faster than those with a short history (e.g. Ghana).
Source: GIGEST, January 2014
Received on Tue Jun 10 2014 - 11:55:11 EDT