Country's Wealth Depends on Citizens' Share of National Pie
June 1, 2012
Why are some countries rich and others poor?
Over the years, experts have pointed to a range of factors they considered crucial—from the relative freedom of markets, through the size of the population, to geography.
James Robinson, coauthor of the newly published Why Nations Fail and contributor to The Occupy Handbook argues that the wealth of a country is most closely tied to how far the average person is able to share in its overall economic growth. He calls that “inclusive growth.”
However, he notes that there is always a tendency in any society for a small group of people to try and concentrate power and wealth in its hands.
In an interview with IMF Survey, Robinson elaborated on his theory of economic development.
IMF Survey: What can countries do to achieve economic success?
Robinson: To have economic success, you need a particular sort of configuration of economic and political institutions in society that sort of back them up and underpin them.
What you need in terms of the economy is a structure of economic institutions which can harness the talents and skills and ideas of its people. We call that inclusive because it has to allow everybody to have property rights and economic opportunities, to take advantage of their skills and talents, to open business, and get an education. But behind that, you need to have a set of political institutions which distributes power broadly in society.
But there are always incentives to oligarchize power, and for some groups of people to try to capture power or take over power. Many are concerned that this big increase in economic inequality in the United States signifies a sort of oligarchization of the society.
IMF Survey: If the increase in inequality in the United States. is a potential signal of America becoming an oligarchy, would you say the Occupy Movement is a protest against this?
Robinson: Historically, there are many examples of how there have been challenges to the inclusive nature of U.S. political institutions. We tried to put Occupy Wall Street into that same sort of tradition of objecting and fighting back.
That is something which is very healthy about the society. It is very good for the long-run health—economic health and political health—of the U.S.
IMF Survey: How did previous social movements succeed in achieving what they struggled to do?
Robinson: One lesson for Occupy Wall Street is that they project this antipathy towards politicians and political parties.
Perhaps one can sympathize with some of that sentiment, but I think the reality is that if they want to have an impact, they need to build bridges with political parties and politicians who are sympathetic with their agenda.
In the book, we also give the example of the French student movement from 1968, which was incredibly successful at mobilizing and grabbing everybody’s attention, but was very bad at building a bigger coalition to get what it really wanted.
IMF Survey: Is the United States becoming one of these nations who fail?
Robinson: I am optimistic about the United States. One of the reasons for this optimism is that in the past the U.S. system has been very robust. We describe this as a virtuous circle.
Once there are inclusive institutions, it creates positive feedback mechanisms which stop the system going off the rails. That is our interpretation of Occupy Wall Street. It is part of the reaction by the U.S. society to this potential oligarchization.
I tend to work in very dysfunctional places. For example, I am on sabbatical in Colombia and South America, I work a lot in Sub-Saharan Africa and I have been doing some research in Haiti. When you spend some time in rural Colombia, or in Sierra Leone, or the Congo, then you really begin to appreciate the functionality of U.S. institutions.
I think history does create scope for optimism about the resilience of inclusive institutions in the U.S.
IMF Survey: I want to move on a little bit to your book, Why Nations Fail, the one you cowrote with your current coauthor Daron Acemoglu. In that book you argue that the wealth of a nation is correlated to the degree of which the average person shares in the overall growth. Do you have examples of countries that have actually successfully done so and, as such, have grown?
Robinson: I will give you a somehow controversial example which everyone usually thinks is against us: China. People always say that Chinese economic growth in the last 30 years has been due to the genius of the Communist Party.
However, the reality of Chinese economic growth since the late 1970s is that the economy in China started growing when the Communist Party started disentangling itself from every aspect of people’s lives.
The first thing they did was to introduce incentives into agriculture and allow people to do what they want instead of planning everything. This was enormously successful in terms of productivity. In fact, there was a boom in rural productivity.
The retreat of the Communist Party, and allowing people to use their talents and skills as well as start businesses and live where they want and take the job they want: that is what has generated economic growth in China.
But it is a controversial example. Why is it so? Because people often think that the Chinese case does not fit with our view of the world. The Beijing Consensus is very successful in terms of getting the Chinese economy moving, but ultimately it is unsustainable.
In the 1960s and 1970s, everybody thought that the Soviet Union was a poster child for economic growth. When I was an undergraduate at the London School of Economics in the early 1980s, we were still being taught that if you wanted to have rapid economic growth, you had to have Soviet-style central planning.
Every economics textbook was full of pictures of the Soviet Union’s income overtaking the United States’. Now everyone laughs about that.
However, the Soviet experience has many things in common with the Chinese experience. One of these things is that it was completely unsustainable, but everyone seems to have forgotten about that, so we want to remind them.
IMF Survey: Finally, your thesis suggests that by experiencing deep economic and political changes, a country can drive its economic growth. Should we have a radical change from the current development policies?
Robinson: In our book, we do emphasize much more on the political side. I think the economic institutions are crucial for generating economic growth and development, but it is the politics that underpins particular sets of institutions.
One way of thinking about it is to ask why so many attempts by international institutions and states to reform policies or institutions have been unsuccessful.
Take the Washington Consensus for example. It was implemented in Latin America in the 1990s. Some people are of the opinion that these policies were tried but failed, therefore were wrong.
Our view is completely different. We believe that lots of these policies in the Washington Consensus were actually eminently sensible policies. But the politics in those countries did not change. If the politics do not change, then you cannot change the economy.