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Understanding why nations fail

By Osa Mbonu

The masterpiece, Why nations fail: The origins of power, prosperity and poverty, authored by Daron Acemoglu & James A. Robinson and published in 2013 by Profile Books Limited, began its enquiry into this subject with the tale of city of Nogales, which is cut in half by a fence.

The northern part of the city called Nogales Arizona in the Santa Cruz County, falls within the United States of America, while Nogales Sonora on the south falls within Mexico. “The inhabitants of Nogales Arizona, and Nogales Sonora share ancestors, enjoy the same food and the same music, and…have the same culture,” the authors write. In fact, the entire city of Nogales had been a Mexican city until 1853, when the United States purchased the northern part of it after the Mexican-American War of 1846-1848, making the United States to extend its border into the area.

The story, however, regardless of the sharing of the same culture, ancestry and blood, is that the people living across the fence on the northern side are economically prosperous, while those who live on the south are afflicted with poverty. “How could the two sides of what is essentially the same city be so different? The authors query. There is no difference in geography, climate, or type of diseases prevalent in the area, since germs do not face any restriction crossing back and forth between the United States and Mexico.”

The income of the average household in Nogales Arizona is about $30,000 a year, and most of its teenagers are in school while most of the adults are high school graduates. Medicare, electricity, telephones, sewage system, public health, good road network linking to other cities in the area and other parts of United States and most importantly, law and order, are not only available in Nogales Arizona, but taken for granted by the citizens.

In Nogales Arizona, functioning democracy is also taken for granted. The people of Nogales Arizona are certain that government is their agent, and that they can vote to replace their mayors, congressmen, senators and president without any electoral fraud.

Life on the southern side of the fence is different. The income of the average household in Nogales Sonora is one-third of what people earn in Nogales Arizona. Most adults here do not have high school degrees and many of their teenagers are not in school. Poor public health services resulting in low life span, lack of access to public amenities, dilapidated roads, insecurity and absence of effective law and order, bribery, corruption and hostile business environment, are the order of the day in Nogales Sonora, why?

The simple explanation for this dichotomy is that Nogales Arizona is in the United States of  America, where people have access to inclusive economic institutions “which enables them to choose their occupations freely, acquire schooling and skills and encourage their employers to invest in the best technology, which leads to higher wages for them. They also have access to (inclusive) political institutions that allow them to take part in the democratic process, to elect their representatives, and replace them if they misbehave. In consequence, politicians provide the basic services that the people demand.”

People in Nogales Sonora live in a different world, shaped by extractive (or exploitative) institutions whose end products are poverty and state failures.

“These different institutions create very disparate incentives for the inhabitants of the two Nogaleses and for the entrepreneurs and businesses willing to invest there. These incentives, created by different institutions of the Nogaleses and the countries in which they are situated are the main reason for the differences in economic prosperity on the two sides of the border (and elsewhere in the world).”

Questions are asked why the economic and political institutions of the United States are conducive to economic success while those of Latin America, for instance, are not? “The answer to this question,” the authors write, “lies in the way the different societies formed during the early colonial period. An institutional divergence took place then, with implication lasting into the present day.”

A similar example is also proffered in chapter 3, titled: The making of prosperity and poverty. This time, it is the Koreans – North Korea and South Korea.

Like Nogales Arizona and Nogales Sonora, North Korea and South Korea share the same culture, geography and ancestry. Being colonised by Japan, Korea was split into north and south after the Japanese lost the Second World War and unconditionally surrendered on August 15, 1945.  Subsequently, North Korea was inherited by Russia, while South Korea went to the United States, two major victors of the war.

South Korea, with the help of the United States, was led and shaped by the Harvard-and Princeton-educated anti-communist named Syngman Rhee. Rhee and his successor, General Park Chung-Hee “governed a market economy where private property was recognised, and after 1961, Park effectively threw the weight of the state behind rapid economic growth, channeling credit and subsidies to firms that were successful.”

In the North, the Soviet helped Kim Il-Sung to establish himself as a dictator. Private property was outlawed, and the markets were banned. Freedoms were curtailed, not only in the marketplace, but in every sphere of North Koreans’ lives – except for those who happened to be part of the very small ruling elite around Il-Kim Sung and, later, his son and successor, Kim Jong-Il.

Expectedly, the type of economic institutions that emerged out of such extractive political institution was also extractive. Recurring famine, failure of takeoff of industrial production, collapse in agricultural productivity and other economic woes became the trademarks of North Korea. “The stifling, repressive regime was inimical to innovation and the adoption of new technologies. But Kim Il-Sung, Kim Jong-Il, and their cronies had no intention of reforming the system ….or changing economic and political institutions. North Korea continued to stagnate economically….while South Korea quickly became one of East Asia’s “Miracle Economies,” one of the most rapidly growing nations in the world. “

Creative destruction & the Luddites

Often, the occurrence of creative destruction is necessary in a society if that society must move from poverty to prosperity. Economic institutions that create incentives for economic progress may simultaneously redistribute income and power in such a way that a predatory dictator and others with political power may lose out. This is what the economist, Joseph Schumpeter, called creative destruction – the replacement of the old with the new, attraction of resources by new sectors away from old sectors, the taking of businesses by new firms away from established ones, the rendering of existing skills obsolete by new technologies, etc.

“The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.”

Although mechanisation led to enormous increases in total incomes and ultimately became the foundation of modern industrial society, it was bitterly opposed by many. Apart from the elites who formed formidable opposition against industrialisation, “artisans, whose manual skills were being replaced by mechanisation, also opposed the spread of industry. Many organised against it, rioting and destroying the machines they saw as responsible for the decline of their livelihood. These were called the Luddites – resisters of technological change.

The house of John Kay, 1733 inventor of the flying shuttle, a major improvement in the mechanisation of weaving, was burnt down by the Luddites in 1753. James Hargreaves, inventor of the popular spinning jenny, suffered similar fate.

In the works of Pliny the Elder, the great Roman writer, he told a story of a man who invented unbreakable glass during the reign of Emperor Tiberius. In excitement, the man took his invention to Emperor Tiberius in the hope of being rewarded. The emperor asked him whether he had told anyone about his invention. When the man replied no, the emperor had him dragged away and hanged, “lest gold be reduced to the value of mud.”

Where Nigeria belongs

From the authors’ definition of extractive institutions as institutions designed to extract incomes and wealth from one subset of society to benefit a different subset, we can see that Nigeria belongs to this category of countries with extractive political and economic institutions left behind by the British colonial masters and inherited by the elite. Nigeria, and other countries similar to it, is poor because it has been ruled by a narrow elite that have organised society for their own benefit at the expense of the people. “Political power has been narrowly concentrated, and has been used to create wealth for those who possess it…” This book argues that all poor countries are poor for this reason. Countries such as Britain and United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of the people could take advantage of economic opportunities. All these go to show that there is a relationship between poverty and politics.

These are the reasons those who are benefiting from the poverty in Nigeria, supported by some others, will always argue that restructuring is not the solution to Nigeria’s problem. In reality, they do not want fundamental changes or reforms. The only things they are willing to change are trivial and cosmetic things like Democracy Day and status of past political events and political enemies whom they murdered.

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