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16 March 2012

The wealth of nations

From Malthus onwards, population growth has been a favourite explanation for why some countries are rich while others are poor. Other theories have focused on geographical location, natural resource endowments and colonial history.

All of these ideas have something to be said for them, but according to the economist Daron Acemoglu – profiled by Adam Davidson in the New York Times – there is a much better explanation:

  • "If poverty were primarily the result of geography, say, or an unfortunate history, how can we account for the successes of Botswana, Costa Rica or Thailand? Now, in their new book, “Why Nations Fail,” Acemoglu and his collaborator, James Robinson, argue that the wealth of a country is most closely correlated with the degree to which the average person shares in the overall growth of its economy... when a nation’s institutions prevent the poor from profiting from their work, no amount of disease eradication, good economic advice or foreign aid seems to help."

Davidson offers some supporting evidence of his own, citing "one of history's great economic experiments" – the newly liberated Baghdad of 2003 – where "one of the world's most tightly controlled economies suddenly became a free for all":

  • "Nearly every engineer from the ministry of housing, it seemed, had opened his own construction company. Satellite TVs, once illegal to all but a very small elite, were sold on every major street... there were so many new Internet companies that I had far more access options then than I do today in Brooklyn."

But then this happened:

  • "The American authorities, who had not planned for this budding free market, all but destroyed it when they gave the bulk of new contracts to large companies outside the country. Often, these outsiders subcontracted to Iraqi firms with close ties to the state’s new political establishment. By the anniversary of the United States invasion, it was clear that economic success would again come from connections and corruption rather than talent and hard work."



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