Why Economic Backwardness Persists

November 30, 2012

In many societies around the world, rulers continue to maintain institutions that stifle economic growth and keep its citizens impoverished. Massachusetts Institute of Technology economist Daron Acemoglu and Harvard University economist James Robinson wrote an article recently in the American Political Science Review analyzing the reason for this. Their conclusion: rulers calculate that it is better to keep people in poverty than risk losing the privileges of political power, says Ronald Bailey, Reason Magazine's science correspondent.

  • Superior institutions, such as free markets for labor, capital and resources, as well as strong property rights and the rule of law, promote economic liberalization and prosperity.
  • However, some leaders are afraid that these institutions will destabilize the system that allows them to have political power.
  • Furthermore, leaders risk losing future rents (diverted funds from productive parts of society to themselves).

However, there are situations in which political leaders will adopt market-based reforms. On opposite ends of the spectrum exists elites that are well-entrenched in their seat of power and elites that have considerable competition among rival political groups. In both cases, economic liberalization is permitted because well-entrenched leaders don't have to worry about losing their power and countries with competing political groups adopt reforms because they recognize that citizens can remove incumbents.

However, countries where the regime is somewhat entrenched are the ones that fear replacement and thus don't adopt liberalizing economic policies.

Countries that are threatened by external invasions are also likely to promote liberalization to evade attack. Moreover, countries with an educated citizenry can promote liberalization because an educated populace is able to produce and operate more sophisticated technologies and take advantage of the new entrepreneurial opportunities.

Empirically, this theory has held true throughout modern history. Nineteenth century Britain and Germany adopted liberalization because they were politically entrenched. In the United States, fractured political parties adopted economic liberalization to compete for votes. However, in Russia and Austria-Hungary, insecure regimes blocked liberalization.

Source: Ronald Bailey, "Why Economic Backwardness Persists," Reason Magazine, November 27, 2012.

 

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