Peter Lyons: National wealth goes much deeper than resources

Until the 15th century, Europe was an economic backwater compared to the prosperous Middle and Far East. Photo / Greg Bowker

Opinion

One of the most fascinating questions in economics is why are some countries rich and others poor?

A simple answer is that it's because of their natural resources, but this is easily undone when comparing the prosperity of Japan with resource-rich Nigeria.

Another argument has been the different cultural attitudes towards enterprise, technology and wealth creation. This suggests the inherent characteristics of different nationalities prevents their material success. This argument does not bear much scrutiny given the ebbs and flows of regional prosperity throughout history.

Until the 15th century, Europe was an economic backwater compared to the prosperous Middle and Far East.

A recent book called Why Nations Fail (Daron Acemoglu and James Robinson) contributes some fascinating insights into the question. The book contains findings that should be compulsory reading for those aspiring to political leadership.

The key argument is that a nation's prosperity is closely linked to the inclusiveness of its institutions such as its legal, political and educational systems. Numerous case studies of countries are used to illustrate this. These institutions are often the product of minor historical deviations that, over time, lead to major divergences in national prosperity. Australia's adoption of a compulsory superannuation scheme over 20 years ago can be contrasted with New Zealand's recent efforts to address this issue.

The authors use the example of the Glorious Revolution in England in 1688. This revolution led to a limited form of parliamentary government. Absolute rule by monarchy was the norm for much of the rest of Europe.

The early English Parliament represented the interests of a narrow group of landowners and merchants. Over many years and struggles this institution came to represent a wider set of interests. This led to a more inclusive and favourable commercial environment that contributed to the Industrial Revolution.

A central theme of the book is that national prosperity is not a predetermined outcome. Countries are not destined for eternal poverty due to a lack of resources or geographic isolation or cultural inferiority. More ominously, prosperous nations are not guaranteed to remain so. The authors use the example of Argentina to illustrate this point.

They contrast the fortunes of those nations that developed inclusive institutions with those that haven't. They compare countries such as England, Botswana and Australia with countries such as Somalia or Sierra Leone. The latter nations are characterised by extractive unstable political and economic institutions that generate a continuous, vicious cycle of poverty.

Leaders of these nations come and go with regularity and the cycle of exploitation continues. There is a natural inclination for leaders to continue extracting wealth from their populace because their tenure in power is so insecure. There are few incentives to develop a rule of law or secure property rights or public infrastructure.

National prosperity is not predetermined nor guaranteed in its continuity. It is largely the outcome of institutional factors that are the product of human actions and history.

The implication for policy makers is the need for constant critical reflection about the institutional framework of their country. Areas such as government tax and spending, monetary policy, the legal framework, health and education and income distribution should be subject to constant scrutiny and informed debate. The aim is to maintain a system favourable to enterprise while balancing the need for social justice.

Aspiring leaders in a democracy need to identify and articulate the core issues to the electorate. In a globalised world economy, policy drift can be severely penalised. Unfortunately, modern democracies often favour sound bites and scandal over substance. There is sometimes a reluctance to address the real issues for fear of a voter backlash.

There is almost a disdain for the intellect of the average voter. Examples in the current New Zealand context include superannuation, monetary and taxation policies and education. In the long-term, a poor institutional framework can cost a nation dearly.

Peter Lyons teaches economics at St Peter's College in Epsom and has authored several economics texts.