Why nations fail
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After reading one of my previous write-ups on “Prosperity through democracy and elections” in this column a few weeks ago, Alabi Moshood – a University lecturer from Africa, studying for a Doctorate degree in Economics, sent me a text message: “A very brilliant piece sir; well said. Policy formulation has never been our problem, rather it is about having the right leaders with the political will to deliver the desired outcome.”His comment inspired me to revisit the issue that I addressed in the above article, but this time it is from a different angle. In the above article, I argued against the popular notion that countries with democracy and elections are unlikely to achieve prosperity. I argued that it is not the “democracy and elections”, but rather the “compromise on the rule of law” which leads to weaken the institutions. I posed the question that democracy and elections have never been an obstacle to compromise on the rule of law. Has it ever been a barrier to engage in indisciplined acts or corrupt practices or abuse of power? How is it possible then that the same democracy and elections would be a barrier to development?
Some nations are rich, while others remain poor. Some nations prosper while others continue to struggle even to manage their economic affairs – incomes and jobs, government budget, external finance and public debt. What is the reason? I thought of focusing on this question today.
Having resources
A nation’s prosperity depends on the ability to create wealth. About 200 years ago, it took 100s of years for a nation to become rich. But during the past 100 years, the time required to become rich became shorter and, it was even shorter for smaller countries than for bigger countries. In fact, within the past 50 years, many countries in Asia have proved to be richer even within a quarter of a century that is in front of the eyes of one generation.
By looking at the sources of growth, many would consider the importance of the availability of resources as the main cause of becoming rich. Well, if we go by this argument, then resource-abundant countries should become rich, while resource-scarce countries will have no hope. Then it is a question as to why the Latin American country Venezuela, which has the world’s largest proven oil deposits, failed miserably. The same is true for some African countries such as Nigeria, which struggles today to manage its economic affairs in spite of having large oil deposits. In fact, it is the African continent which has the world’s largest mineral resources – precious metals such as gold, silver and titanium, precious stones such as gems and diamonds, and mineral sands and oil. But until the recent past, Africa continued to be the home for the world’s poorest nations.
The flip side of the same coin is that if resources are the underlying factor of prosperity, then it is difficult to explain the prosperity of the countries which do not possess the resources. Asia’s richest countries such as Japan and Singapore did not have resources for creating wealth. In spite of having no drop of oil of its own, Singapore has become Asia’s largest oil trading hub and the world’s largest bunkering port, while the country’s oil industry adds about 5 per cent of its GDP.
File picture of a drought-affected land in Sri Lanka.
Agricultural land
It is a good thing for a country to have a prosperous agriculture and even better to have abundant land for cultivation. But the shocking piece of information is that agriculture has never been important for wealth creation, and neither for even food security. Two countries with the world’s largest agriculture land are the US and Australia, while the size of their agricultural land is about 4 million square kilometers in each country. But the agriculture sector contribution to GDP is only 1 per cent in the US and 2 per cent in Australia. Even though the agriculture sector provides inputs into the processing industry and exports, an overwhelming share of wealth creation in both countries takes place outside agriculture.
The top-10 countries in the world with “the highest food security” are Singapore, Ireland, the US, Switzerland, Finland, Norway, Sweden, Canada, Netherlands and Austria. They all are rich countries, but none of them has more than 2 per cent agriculture contribution to GDP. It is quite strange to figure out that the country with the world’s highest food security is Singapore, which as a
land-scarce country has almost zero agriculture contribution
to GDP.
It is not the fact that smaller countries do not have an advantage in agriculture. Netherlands is a small country which has a competitive agriculture productivity similar to that of a big country like the US. An average farmer in the Netherlands contributes about US$75,000 to the country’s GDP, whereas in Sri Lanka an average farmer contribution to GDP is about $3,500. The point that I want to stress is that having agricultural land does not necessarily make a country rich; having no agricultural land does not make a country poor either.
Labour, capital and technology
Educated and skilled labour are necessary for creating wealth, but none of the countries in the world had skilled labour at the beginning. They all invested in creating a skilled labour force on the one hand and imported the skilled labour from foreign countries to fill any shortage on the other hand. Thus, the shortage of skilled labour has never being a binding constraint to development. Besides, having skilled labour alone does not guarantee development either, because some of the countries export their skilled labour for the benefit of other countries.
Capital is needed for investment and technology is needed for productivity. Shortage of domestic savings is also not a binding constraint to development, because the domestic savings gap could be bridged with foreign capital. There are billions of dollars which remain accumulated in the world seeking better investment locations. About 25 years ago, the foreign capital outflows in the world amounted to $200-300 billion, which has now grown to about $1,500 billion and turned increasingly to developing countries in Asia. And technology is a commodity that can be purchased in the global market. Technology is also transferred along with foreign capital provided that there is a better and trustworthy investment climate.
Policy and institutions
It is clear that the availability of any of the resources mentioned above is not the underlying factor of creating wealth. The two main pillars on which the prosperity of a nation rest are the policy and institutions, while both are the choices of the leaders of the nation.
Among the two pillars, the choice of “policy” is less ambiguous today than ever before. The most convincing principle which guides the development policy is that a nation’s ability to create wealth is limited by the size of the market. Therefore, income generation and job creation as well as the speed of this process – whether it is within a decade or within a half century-, depends on the policy choices.
The second is again a choice by the leaders to influence “institutions” which is even more critical than the policy choice, because their impact would be carried forward for generations having no time to make corrections. By the term institutions, we refer to the established patterns of behaviour in a society and polity. Even if there are mistakes in policy choices, there is time to correct these mistakes. But the betrayal of the development potential by weakening the institutions such as the “rule of law” cannot be corrected.
Therefore, nations fail, when the leaders fail when they decide to compromise on the established behaviour patterns of a civilised society, which undermine the development potentials. In conclusion, we can say that being rich or poor is a choice of a nation, or rather the choice of the nation’s leaders who have a vision for the nation as well as a mission to reach that vision.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal @econ.cmb.ac.lk and
follow on Twitter @SirimalAshoka).