The case of China in relation to the hypothesis of Nobel laureates Acemoglu and Robinson (together with Simon) is still open to debate. Is the current slow down of the Chinese economy already evidence that economic growth in countries with extractive institutions unsustainable? Or will China be able to recover while still remaining to have authoritarian leadership? Only time will tell. There are other cases in economic history that may be used to question the “Why Nations Fail” theory. Here, I present the contrary views of the famous billionaire Bill Gates. In a review of the book in his GatesNotes, he refers to the book Why Nations Fail as a “major disappointment.” He found the authors’ analysis vague and oversimplistic. Beyond the “inclusive vs. extractive” view of political and economic institutions, Gates claims that the authors largely dismiss other factors, disregarding both history and logic. For example, in their reference to economic growth during the Roman times, they disregarded the historical fact that before 800 AD the economy everywhere was based on sustenance farming. This meant that it did not really matter whether or not various Roman government structures were inclusive or extractive.
Gates gave an example of an illogical reasoning. This has to do with their reference to the decline of Venice. According to them, the economy of Venice deteriorated because of the reduction in the inclusiveness of the institutions. The historical fact, however, was that Venice declined because of the intensification of competition. The change in the inclusiveness of institutions was more a response to increased competition in the spice trade, which their merchants previously monopolized, than the source of the problem. Even if Venice had managed to preserve the inclusiveness of their institutions, it would not have made up for the loss of the spice trade. Another questionable case the authors used to demonstrate the critical role of inclusiveness for economic growth was that referring to the decline of the Mayan civilization in South America. They suggest that infighting—which showed a lack of inclusiveness—explains why the Mayan civilization declined. The historical fact, however, was that the decline could be attributed mainly to the reduction of agricultural productivity because of harsh weather and scarcity of water, which undermined the Mayan leaders’ claims to be able to bring good weather.
Gates then gave more recent examples that tend to disprove that political inclusiveness is a pre-requisite to economic growth. There are outstanding examples over the last fifty years in the East Asian region of exclusive societies like Hong Kong, South Korea, Taiwan and Singapore attaining phenomenal economic growth. Both Thailand and Vietnam were under military authoritarian rule when they attained significant economic progress, especially based on the increase of productivity of the agricultural sector. Gates also disagreed with the way Acemoglu and Robinson ridiculed the so-called “modernization theory”, according to which there can be instances where a strong leader can make the right choices to help the country grow, after which there can be a good chance the country will evolve to have more “inclusive” politics. This happened in Taiwan and South Korea where Chang Kai Sek and Park Chung Hee, respectively, ruled with authoritarian powers leading their respective economies to high rates of economic growth, after which their countries evolved into more “inclusive” politics. This can also apply to Spain that was under an authoritarian regime led by Francisco Franco. Despite being ostracized by the rest of the western world for having sided with Hitler during the Second World War, the Spanish economy achieved significant economic progress during the 36 years of Franco’s dictatorship and then evolved into a democratic society after Franco died in 1975.
Gates also pointed out that the book overlooks the incredible growth and innovation in China between 800 and 1400 AD. During this 600-year period, China had the most dynamic economy in the world and produced a huge amount of innovation, such as advanced iron smelting and ship building. This phenomenal economic success had nothing to do with how “inclusive” China was, and everything to do with geography, timing, and competition among empires. Turning to China in modern times, Gates presents an alternative hypothesis. He explains that the very high growth of China and the liberation of some 700 million Chinese from poverty can be attributed, not to inclusive institutions per se, but to the adoption of capitalistic economics—independent of the political system. When a country focuses on getting infrastructure built and education improved, and it uses market pricing to determine how resources should be allocated, then it moves towards growth, whatever the political institutions may be.
In general, criticisms of the hypothesis developed by the 2004 economics laureates are based on their questionable assumption that certain institutions are the pre-condition for economic development. Musta-faq Kahn, a professor at the University of London, maintains that what Why Nations Fail mainly shows is that today’s high-income countries score high on western-based institution indexes such as good governance, trade openness, or protection of human rights. The hypothesis does not prove that development was achieved because states first established inclusive institutions. History is rife with examples of countries that grew rapidly without having these inclusive institutions in place as a precondition for growth. We already have referred to Singapore, South Korea, Taiwan and more recently China as examples of economies that grew rapidly during periods when inclusive institutions did not exist.
The award-winning books on China’s development by Yuen Ang have laid in detail how Chinese society was riddled with corruption during its growth process. In fact, she went out as far as to say that the theory of the trio not only fails to explain the phenomenal growth of China in recent years but also the impressive economic progress of the West in the 19th century. She points out that institutions in the US were smeared with much corruption during the country’s development process. Along this line, a favorite illustration of mine is the more modern case of South Korea that has reached First World status despite what the addicts to K-drama know: that South Korea’s many institutions, i.e. the police, the military, the chaebols, the judiciary system and many other political and economic institutions continue to be riddled with corruption. Just watch the most famous Korean TV series “Crash Landing on You” and you will know what I mean. To bring it closer to home, the Philippines is now being cited as the new economic star of the Indo-Pacific region (together with Vietnam and India) despite our inability to root out corruption and to ban such extractive institutions as political dynasties at both the national and local levels.
When I, together with many other advocates for good governance, fight to rid our society of corruption (in both the public and private sectors), my main motivation is not economic but moral. Let us eliminate corruption because it is evil, it is an injustice and for those of us who believe in the spiritual side of man, it is a sin. I don’t care if some people even theorize that a minimum level of corruption (bribery, influence peddling, conflicts of interest) may be necessary to “grease” economic growth. Corruption is evil and evil must be eliminated as much as possible from our society. If some people maintain, with some realism, that we will never be able to eliminate completely corrupt practices and, therefore, using the language of Acemoglu et al, will have to live with extractive institutions for a long time, I do not conclude that we can never be a First World economy. We have seen how in the past thirty years, despite widespread corrupt practices in both the public and private sectors, we have been able to discard our reputation as the “sick man of Asia” by gradually allowing the best and the brightest of our technocrats to correct serious economic policy errors and build stronger economic institutions (like our Central Bank). Yes, let’s persevere in eliminating corruption and bad governance in our society. But more importantly, let us protect all the gains we have achieved over the last thirty or so years in implementing the correct economic policies (a prudent balance between a market economy and effective state intervention when markets fail). Let us also continue to strengthen our economic institutions, even if our political institutions take much longer to reform. To be continued.