Cooperation between citizens, strong check-and-balance mechanisms and the nurturing of institutions are three main reasons that lead to national success
August is the holiday month – the time when we pause to take stock of a hectic first half of the year, and wonder what lies ahead.
Nestled in the hills of northern Laos, the ancient city of Luang Prabang sits around a bend in the River Mekong, isolated for centuries and renowned today as a city of 15th century Buddhist temples, protected as a Unesco Heritage site. It was a good place to catch up on one’s history to try to comprehend an uncertain future.
The recent bestseller by MIT economics professor Daron Acemoglu, and Harvard political scientist James Robinson, “Why Nations Fail: The Origins of Power, Prosperity and Poverty”, argues that national failures were all due to manmade factors – more specifically, how political institutions became extractive, rather than inclusive.
Acemoglu and Robinson are provocative because they stir up the debate on why Latin American economies never quite made it, even though they were resource rich. They did not succeed despite their huge wealth because their political institutions remained extractive, meaning a few hundred families or elite essentially controlled the key resources of the continent for their own benefit.
Another obvious example is the difference between North Korea, one of the poorest countries in the world, and South Korea, an innovative and dynamic economy capable of challenging the best of the West, by learning from the West.
The Acemoglu and Robinson book touches on a raw nerve because many in the West are unsure whether they will continue to be dominant in the years to come. They argue that China will sooner or later stop growing because the institutions there are becoming extractive. But as one review argued, it cannot be ruled out that Chinese institutions will evolve into inclusive systems. After all, China could not have succeeded without being inclusive – taking more than half a billion people out of poverty.
In the same genre, Stanford professor of classics and history, Ian Morris’s 2011 book, “Why the West Rules – For Now: The Patterns of History and What They Reveal About the Future”, also takes a grand sweep, arguing not only about the factors of biology and sociology, but also about geography.
Instead of Acemoglu and Robinson’s dictum, “institutions, institutions and institutions”, Morris considers that it is more about “location, location, location”. He argues that biology and sociology explain the similaries in development between the East and West, but “it is geography that explains why the West rules”.
This view concurs with Asian historian Wang Gung-wu’s perceptive insight that the West developed maritime and, today, air and cyberspace technology and power, whereas China remains essentially a continental or land-based power. Thus, geography does shape behaviour and perception.
I am less persuaded by what has caused nations to fail than what has caused them to succeed, and not just succeed for a few decades, but remain relevant for centuries.
Most people forget that the first modern economy in the world was not Portugal or Spain, or England, but Holland. Even though the Portuguese and Spaniards opened up the maritime routes to the Americas and the Spice Islands, they remained feudal powers that never evolved the institutions to manage their colonies efficiently and professionally.
Last month in Amsterdam, I was given a copy of Marius van Nieuwkerk’s history “Dutch Golden Glory: The Financial Power of the Netherlands Through the Ages”. This wonderful gem of a book, beautifully illustrated, attributes the rise of Holland to the conquest of man over water. Holland has a population of only 16.6 million, in an area 20 per cent larger than the island of Taiwan. It ranks 17th in the world in terms of GDP, and 14th in terms of GDP per capita, at $46,100, just behind the US ($50,000) and Japan ($46,700), but ahead of old rival, Britain ($38,600).
Historically, because of the constant flooding of low-lying land, the Dutch learnt to work cooperatively to build dykes, through “poldering” – constant irrigation, drainage and pumping of water. Thus, in their constant struggle against flooding and the weather, the Dutch developed their infrastructure cooperatively, learning how to manage risks through precaution (high savings), consultation (constant feedback) and inspection (maintenance of strict standards). To do so, they built highly inclusive, flexible and innovative institutions that opened up to global trade.
Their constant struggle against water meant that the Dutch had superior shipbuilding technology, drawing on timber from the Baltic areas and arbitrating trade with northern Europe. By 1598, the Dutch had established the first Insurance Chamber, and by 1602 the largest trading company (the VOC). They created the forerunner of the first central bank, the Amsterdam Exchange Bank, in 1609, as well as the Merchants’ Exchange in 1611, and the Grain Exchange in 1616.
The VOC, which had a trading monopoly in the East Indies spice trade, was so profitable that between 1602-1796 the average dividend was 18.5 per cent annually! Indeed, the Dutch were successful because they were not only good traders, but also insurers and bankers to the rest of Europe. As late as 1750, 30 per cent of the share capital of the Bank of England was owned by the Dutch.
What was remarkable about the Dutch model is not that it was not been taken over by other larger powers, but its sustainability and durability. The Dutch run one of the largest pension funds in the world, and a recent study has shown that there are over 400 Dutch companies with over a century of history, including one that survives from 1530. It goes to show that even if a country is small, through thrift, hard work, openness and good governance, it can succeed despite the odds.
There is much that the East still has to learn from the West. No history is a straight line, and there is nothing inevitable about success or failure. Whether it is “Abenomics” or “Likenomics”, the key to sustainable and inclusive growth is about strong social institutions with the right checks and balances.
Andrew Sheng is president of the Fung Global Institute.