How do you make a country great? It is easy to proclaim the intention – but how do you actually deliver the desired result? Some states have done it, or at least tried to do it, through military power. But is that on its own a lasting option or, for many countries, even a possible one? asks Professor Simon Bridge.
The other way is through economic strength – but are its foundations really understood? Across the Atlantic a much heard of presidential candidate constantly proclaims an aspiration to ‘Make America Great Again’, but without appearing actually to know what that entails. Things like tax breaks, protective tariffs and reducing environmental controls might seem to be popular with existing businesses but do they really underpin a growing economy?
A clear, fool-proof recipe for economic success would be very desirable but does not (yet) appear to be available – so, despite apparent claims from some people, there is no guaranteed route. However, for pointers, it might be helpful to look at studies which have explored what might be the necessary conditions of economic power. Among them two linked suggestions probably stand out which, while they alone would not be sufficient, do nevertheless appear to be among the foundations needed for sustainable economic success:
The first consideration is the nature of political power, backed by institutions and the rule of law. Acemoglu and Robinson looked at why some nations appear continuously to fail while others have a better record of economic success. Their conclusion is that it depends on whether the states in question have an extractive or inclusive regimes. In an inclusive regime economic institutions allow and encourage many people to participate in, and gain from, economic activity and they are backed by inclusive laws which are accepted as binding by everyone including the rulers themselves – even if and when those rulers find some of the rulles frustrating.
An early example, the authors suggest, being Magna Carta which set a clear precedent of a ruler himself agreeing, albeit reluctantly, to follow the agreed rules. In contrast, in extractive regimes, those in ruling positions can and do adjust the laws to suit themselves and their supporters, often in a way which allows them to retain power and extract wealth for their personal benefit. Consequently, once a regime is extractive, there is no significant motivation for those in power to change it, even when a different faction takes over that power.
This means that it is much easier to change from an inclusive regime to an extractive one than to move in the other direction – and therefore extractive regimes are more common and inclusive ones need continuously to protect what they have.
This matters because in inclusive regimes those who acquire wealth legitimately know that they should be able to keep it – and so people feel that it is worth investing in wealth creating ventures. But under extractive regimes why should people take that risk if success is only likely to mean that those with the political power will find a way to take to any rewards away from you? Therefore, in extractive situations, the route to financial benefit is political intrigue not economic endeavour.
As Baumol has suggested that may be enterprising but it is unproductive, or even destructive, and the state as a whole does not benefit because, while wealth may be appropriated by the powerful, more is not generated.
Inclusive laws do not themselves create wealth, but they do facilitate its creation, whereas extractive regimes are like slavery: they provide no incentive for people to do more than necessary as the rewards of anything extra are likely to be expropriated by someone else.
The second suggestion is that trust is important and an inclusive regime is supported by, and indeed itself facilitates, an atmosphere of trust. Fukuyama looked at trust and suggested that a key reason why places like the USA, Japan and north-western Europe developed strong economies was that their cultures facilitated trust beyond just families and close friends. Doing business with others is clearly facilitated by trust: such as trusting that the person who placed an order will take delivery and then pay – and so a society which reinforces such behaviour is a helpful place for economic growth.
The results can be seen in the former city states of Northern Italy where, because people lived close together, trust between neighbours was enforced as the only way for practical life – and that is where industry developed. Whereas in the South of that country, where farming based on separate family units predominated, an extractive’ mafia’ culture evolved and its economy suffered consequently.
Trust is therefore a key part of the social capital necessary for business to thrive: trust in what others say and trust in how they will behave. So anyone who is known to lie to suit themselves and who does not clearly act fairly to others, or who tries to manipulate the legal system to advance their case and frustrate the legitimate concerns of others, is actually undermining economic greatness. Such people might advance themselves to the top of the heap – but it will be a smaller heap as a result.
Trust and inclusiveness can both be destroyed quickly but, once missing, take ages to regain, if indeed that is tried. Therefore, once you have them, it is worth recognising that and making a conscious effort to keep them.
Daron Acemoglu and James Robinson, Why Nations Fail (London: Profile Books, 2013)
William Baumol, ‘Entrepreneurship: Productive, Unproductive, and Destructive’, Journal of Political Economy, Vol.98 No.5, pt.1, 1990, pp.893-921
Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity, (New York: Free Press Paperbacks, 1995)
