Why Some Nations Succeed and Many Nations Fail
Carlos Slim and Bill Gates are two of the richest men in the world. Slim with his Mexican telecommunication monopolies has done little to make either Mexico or the world a more prosperous place. In contrast, the computer revolution, in which Bill Gates was a major player, enriched the lives of people all over the world. In their book Why Nations Fail, Daron Acemoglu and James Robinson claim that the reasons why Slim’s and Gates’ wealth bear such different fruit are the same reasons why Nogales, Arizona is so much more prosperous than Nogales, Mexico, although the cities are divided by no more than a fence which marks an international border. For the most part the people on both sides of the international line in Nogales are of the same ethnicities and share the same history and geographic constraints, but the incentives in each nation are radically different.
The authors claim that broadly-based prosperity is possible only in a nation with the rule of law, protection of private property, constitutionally-limited government, and relatively broadly-based political and economic power.
In failing nations, political control is held in a few hands and a single party. The institutions have been set up so that the people in power can stay in power and benefit themselves and their friends. In Mexico there were only three banks, no real elections, no publicly acknowledged system for registering private property ownership, and no way in which inventors of new ideas could expect to prosper from those new ideas. Except for those in political power, most of the population was consigned to grinding poverty. Mexico has periodically faced bankruptcy and the International Monetary Fund, as a condition of bailing out the government, insisted that some of the many government monopolies be privatized. The Mexican government privatized the telephone monopoly by handing it over to one of its cronies – Carlos Slim. He didn’t put up any money. He “paid” for it out of the proceeds of the company itself, and he picked up other assets at “distressed” prices. With his monopolies, he continued to soak high telephone rates from the Mexican people. In contrast, Bill Gates, after dropping out of Harvard, invented his software in his garage with a couple of his friends, marketed Microsoft products fiendishly, and competed as ruthlessly as he could with his rivals like Steven Jobs who had built Apple in a similar way. In doing so, Microsoft and its competitors computerized the world and raised living standards in places like India and Mexico.
Under the rule of law, Bill Gates was sued by Netscape for building a monopoly. And although Netscape’s case was relatively weak, Gates lost in court, was humiliated on the witness stand, was fined, and was almost forced to break up his company. The flip side of the equation is that he could not have acquired his wealth if he had been operating in a nation without the rule of law.
Without the rule of law the only way to gain economic wealth is to pay bribes, seek patronage from the government, and rely on the police and the state to eliminate your competition. Technological improvement, so essential to real economic growth, is always a threat because it will lead to political change and any political change is likely to lead to major loss of property and life to those at the top of the heap. And so, historically, those governments have granted monopolies on every aspect of the economy and monopolies tend to charge the highest possible prices and provide the lowest quality of goods. Monopolies cannot exist without the force of government behind them.
Acemoglu and Robinson demonstrate it doesn’t matter what the ideology of the people in power is. They always act to preserve their power and that requires eliminating the rule of law and concentrating all economic and political power in a small group of people. These governments routinely kill and imprison their political opponents, confiscate the wealth of their middle classes, and impoverish and starve the mass of their people. And if those political opponents gain power, they do the same. Thus, using radically egalitarian propaganda, the economic inequality in China and Russia increased after their revolutions and tens of millions of their citizens were starved to death because all the food the peasants grew was expropriated by the government. In Africa, with a few exceptions like Botswana, the post-colonial governments exploited their people in much the same ways, and to an even greater degree, than the colonial powers had. Rhodesia’s government may have been unjust, but Zimbabwe’s government is murderous. In too many of these countries, the leaders and their friends are all fabulously wealthy. The other people are fabulously poor.
But times are changing. The Mexican government is turning toward the rule of law and the privatization of large and inefficient state monopolies. Meanwhile, in this country, we are moving away from the rule of law and constitutionally-limited government and toward unlimited government power and cronyism. Government is becoming the only available source of funding for many people and many businesses, and politically, the force of government is being used to silence the government’s political opposition. And perhaps Bill Gates and Microsoft may finally get a real monopoly. It is called the Common Core.
