Do Political Institutions Drive Growth?

An interesting debate has ensued whether inclusive political institutions really promote development.  Are the political institutions that guaranty greater political freedom the only drivers of economic prosperity under all circumstances?

A recently-published book titled “Why Do Nations Fail” authored by Doran Acemoglu and James Robinson has stimulated discussion on the above topic. The authors duo in the opinion of Jeffrey D. Sachs, have concluded that inclusive political institutions have the determinant role in fostering higher growth.

Contrary to what the afore-mentioned writers have tried to establish, Jeffrey D. Sachs has forwarded a set of arguments in his quest to show that there are a number of factors other than the inclusive political institutions, which impact favorably on a country’s economic growth.

Through his review of the book “Why Do Nations Fail” carried by the September/October 2012 issue of Foreign Affairs, Jeffrey D. Sachs, himself a world class development economist, has attempted to analyze the pros and cons of contributing factors to the economic development of countries around the world.

There is a large majority in the current world that believes that political openness, civil liberties and well- protected human rights are precursor to economic prosperity. With this conviction very much under consideration many in the western world are effortful to counsel all development partners that political freedom should precede economic reforms. They ignore the fact that this world has no shortage of examples to disprove the western hypothesis of political extraction obstructing economic openness.

Jeffrey Sachs produces the instance of a number of countries in east and south-east Asia including China where economic prosperity has not been inhibited by political extraction. He talks about a new development model of capitalism espoused by Taiwan, South Korea, Singapore, Vietnam, China. This model of development with an exception of South Korea as it has democratized in the 1980’s, has brought economic prosperity despite political freedom not preceding economic reforms.

In countering the logic of the authors of “Why Nations Fail” the reviewer has presented a comparative study of two countries located in totally different geographic locations. He has argued how geography impacts on a country’s economic development despite the absence of inclusive political institutions. If the prevalence of extractive political institutions were the sole obstacles to economic growth as Doran Acemoglu and James Robinson have tried to prove, the situation of Bolivia and Vietnam would have been different from what we see today.

It is a fact that Bolivia is a geographically-disadvantaged country. Like Nepal it is one of the members of the forum of the Least Developed Countries (LDC), but has greater political and civilian freedom. On the other hand, Vietnam is located in a very suitable geographical area with long sea coastal lines and proximity to economic power houses like China, among others. Vietnam has not provided political and civil liberties comparable to Bolivia’s as measured by Freedom House. The economies of these two countries present great asymmetry. Vietnam has produced economic miracles.

Does the above comparison prompt us to conclude that political freedom has no role in promoting economy? This is an intriguing question. In trying to answer this, the scribe will present a few more examples.

Sachs believes that geopolitics, technological discoveries and natural resources equally play roles as prime factors in impacting on economic growth. More interestingly, he recalls history of authoritarian rulers who sometimes have resorted to economic reforms in the aftermath of some international disasters. Based on such examples he tries to disprove that authoritarian elites are generally hostile to economic progress. One of the noted instances in this regard in his opinion is Prussian authoritarian rulers embarking on administrative and economic reforms soon after they were defeated by Napoleon in 1806 at the Battle of Jena. The international threat rather than any other factor was the reason in the above case for turning to economic reforms. The Prussian rulers then were pursuing economic reforms in order to strengthen their own state in the wake of the defeat at the hands of the French emperor.

Similar evidences are available in history when countries with less inclusive political institutions have been able to achieve remarkable degree of economic progress. South Korea’s rapid industrialization was initiated and the process even received a boost during the 1950’s and 60’s. History testifies that South Korea was under the authoritarian rule of Park Chung-hee (1961-79), whose tenure is identified with industrialization of the country becoming one of the fastest-growing economies in Asia.

In South Korea’s case, however, political opening or democratization in the true sense of the term followed the economic reforms. This cannot be taken as the example which can have universal application. As argued in the previous paragraphs there are countries in the present world where economic miracle has occurred despite the lack of political inclusiveness. Vietnam and even China now occupy very important places in terms of economic prosperity having been able to lower the level of poverty considerably. How inclusive are the political institutions in those emerging economies is no more secret.

Thus it can be argued that politics cannot be the sole determinant of any country’s success. We have countries with extractive political institutions but still they are doing excellent even in mastering state-of-the-art technology and hence achieving enviable economic growth rates in the world which has been plagued by recession since 2008.

In this debate whether political institutions play more decisive roles in a country’s economic growth, the insight of Nobel laureate, Jagdish Bhagwati will be more relevant. In his classic feature “Does Redistributing Income Reduce Poverty” he reveals that growth befits the rich disproportionately. Therefore, he advises that countries should adhere to the principle of “Less Excess and More Access”.

Countries like ours where there is plenty of political inclusiveness but rampant poverty with economy characterized by sluggish growth, maybe the advice of economist Jagdish Bhagwati has more appeal.

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