Why Are Some Countries Rich And Others Poor?

March 16th, 2012

Why are some nations rich and others poor? In a new book called Why Nations Fail, a pair of economists argue that a lot comes down to politics.

To research the book, the authors scoured the world for populations and geographic areas that are identical in all respects save one: they’re on different sides of a border.

The two Koreas are an extreme example. But you can see the same thing on the border of the US and Mexico, Haiti and the Dominican Republic, and dozens of other neighboring countries. In all of these cases, the people and land were fairly similar, but the border changed everything.

“It’s all about institutions,” Daron Acemoglu, one of the authors, explained. “It’s really about human-made systems, rules, regulations, formal or informal that create different incentives.”

When these guys talk about institutions they mean it as broadly as possible: it’s the formal rules and laws, but also the norms and common practices of a society. Lots of countries have great constitutions but their leaders have a practice of ignoring the rules whenever they feel like it.

Acemoglu and his co-author, James Robinson say the key difference between rich countries and poor ones is the degree to which a country has institutions that keep a small elite from grabbing all the wealth. In poor countries, the rich and powerful crush the poor and powerless.

Think of a poor farmer in Haiti or the Congo today or medieval Europe 500 years ago. Sure, he could, maybe, irrigate his land and till the soil and grow more stuff. But they know that the institutions in place guarantee that a well connected member of the elite will show up and claim the spoils. So what’s the point? The poor have no incentive to invest in land or businesses or to accumulate savings. The result – undeveloped land and a poor nation.

James said, “Ultimately, what needs to change is that those countries have to make a transition to having inclusive institutions. And that’s not something that throwing money at them can achieve.”

This can seem discouraging but their message does offer hope, too. Poverty is not the simple result of bad geography, bad culture, bad history. It’s the result of us: of the ways that people choose to organize their societies. And, that means, we can change things.