Why nations succeed, and keep on succeeding
Andrew Sheng says their enduring success is built on inclusive, flexible and innovative institutions
August is 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 Mekong, isolated for centuries and renowned today as a city of 15th-century Buddhist temples. It was a good place to be catching up on one's history to try to comprehend the 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 are all due to man-made factors; more specifically, it chronicles how political institutions become "extractive", rather than inclusive.
Acemoglu and Robinson stirred up debate on why Latin American economies never quite made it, even though they were resource-rich: despite huge wealth, a few hundred families or an elite controlled the key resources for their own benefit, thus remaining extractive.
The book touches a raw nerve because many in the West are unsure whether they will continue to be dominant.
The authors argue that China will sooner or later stop growing because its institutions are becoming extractive. But, as one review argued, Chinese institutions may well evolve into inclusive systems. After all, China could not have succeeded without being inclusive - taking millions out of poverty.
In the same genre, a book by Stanford professor of classics and history Ian Morris, Why the West Rules - For Now: The Patterns of History and What They Reveal About the Future, also makes a grand sweep, arguing not only about the factors of biology and sociology, but also about geography. So instead of Acemoglu and Robinson's dictum, "institutions, institutions and institutions", Morris says it's more about "location, location, location". He argues that biology and sociology explain the similarities in development between the East and West, but "it is geography that explains why the West rules".
This view concurs with Asian historian Wang Gungwu's perceptive insight that the West developed first maritime and then air and cyberspace technology and power, whereas China remains essentially a continental, or land-based, power. Geography does shape behaviour and perception.
Personally, I am less persuaded by what caused nations to fail than what caused them to succeed, and remain relevant for centuries.
Most people forget that the first modern economy in the world was not Portugal, Spain or England, but the Netherlands. Even though the Portuguese and Spaniards opened up the maritime routes to America 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 gem attributes the rise of the Netherlands to man's conquest of water.
Historically, because of constant flooding in its low-lying land, the Dutch learnt to work together to build dykes, through "poldering" - the constant irrigation, drainage and pumping of water. Thus, they developed their infrastructure co-operatively, 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 the Dutch had superior shipbuilding technology, drawing on timber from the Baltic areas and arbitraging the trade with northern Europe. By 1598, the Dutch had established the first insurance chamber; the largest trading company by 1602 (VOC); and the forerunner of the central bank, the Amsterdam exchange bank, in 1609.
The VOC, which had a trading monopoly for the East Indies in the spice trade, was so profitable that between 1602 and 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.
What is remarkable about the Dutch model is its sustainability and durability. The Netherlands runs 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 survived from 1530. It goes to show that a country may be small, but through thrift, hard work, openness and good governance, it could succeed.
There is much that the East still has to learn from the West. There is nothing inevitable about success or failure. Whether it is Abenomics or Likonomics, 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