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‘Why Nations Fail’: A timeless lens on economic prosperity

Coins of different nations.

The economy is what matters most. Though society and the environment are important, their significance can often be traced back to economic concerns.

The environmental imbalance, which has given rise to global warming and climate change, is a concern primarily because of its potential to disrupt the global economy. Even technology is seen as a double-edged sword in its economic impact. Unless effectively managed, we have been warned that technologies like artificial intelligence (AI) can cut both ways in economic terms.

The same applies to the much-debated issues surrounding biotechnology and genomics. This explains why every time the Nobel Prize winner for economics is chosen, it stirs up significant interest. The most recent winners were selected principally because of their years of research undertaken to answer the question: why do some nations fail while others succeed?

The book ‘Why Nations Fail: The Origins of Power, Prosperity, and Poverty’ by Daron Acemoglu and James A. Robinson, though highly influential and widely celebrated, did not win the Nobel Prize in Economics. However, its authors are esteemed economists, and their work aligns with the kinds of rigorous inquiry that often receive such recognition. The book explores why some nations achieve economic prosperity while others remain trapped in poverty.

Acemoglu and Robinson argue that the key determinant of a nation’s success lies in its institutions. They categorise these into two broad types: inclusive institutions, which promote broad participation in economic and political activities, enforce property rights, and uphold the rule of law; and extractive institutions, which concentrate power and wealth in the hands of a few, stifling innovation, discouraging investment, and perpetuating inequality and stagnation. It is time to ponder where Malaysia stands in these two classifications.

The book illustrates how historical events shape institutional frameworks. For instance, the divergent paths of North and South Korea highlight how institutions determine economic outcomes. Events like the Glorious Revolution in England (1688) altered power dynamics, creating more inclusive institutions that led to industrialisation and prosperity.

While geography and culture influence development, the authors argue that they are secondary to the role of institutions. They challenge deterministic theories that attribute success purely to geographical advantages or cultural traits. Another example offered by the book is the town on the US-Mexican border, Nogales, which is divided into Nogales, Arizona (United States) and Nogales, Sonora (Mexico).

Nogales is geographically one community, sharing the same climate, culture, and history. However, the two sides of the town experience starkly different economic and social outcomes: Nogales, Arizona, enjoys higher income levels, better public health, stronger infrastructure, and access to quality education and law enforcement. In contrast, Nogales, Sonora, experiences lower income levels, weaker institutions, less access to quality education, and greater issues with corruption and violence.

The authors use Nogales to demonstrate how institutions, rather than geography, explain disparities in development. Inclusive institutions in the United States provide incentives for investment, innovation, and productivity. These include secure property rights, functioning legal systems, and democratic governance. Historically, extractive institutions in Mexico have concentrated power and wealth, limiting economic opportunities and fostering inequality and corruption.

Nogales exemplifies how institutional structures, even within the same geographical and cultural setting, can shape vastly different outcomes. It also challenges geographical determinism, as both sides of the border share similar physical characteristics, yet institutional differences lead to contrasting economic realities.

There are criticisms and counterarguments. Critics argue that the book simplifies complex economic phenomena by emphasising institutions while downplaying other factors like global trade systems or environmental constraints. Others claim ambiguity in prescriptions. While the book diagnoses the problems of extractive institutions, it offers fewer practical solutions for nations trapped in such systems.

‘Why Nations Fail’ has significantly influenced policy discussions, academic research, and public understanding of development economics. It aligns with the broader efforts in economics to emphasise the interplay between politics, economics, and history in shaping prosperity. It is good to evaluate whether such forces are also at work at home.

Professor Datuk Dr Ahmad Ibrahim is an Associate Fellow at the Ungku Aziz Centre for Development Studies (UAC), Universiti Malaya.

The views expressed here are the personal opinion of the writer and do not necessarily represent that of Twentytwo13.