Why Nations Fail?
I appreciate the opportunity to collaborate with the Spanish-language edition of Newsweek. With this in mind, here is my first contribution that I sent to the magazine that circulates throughout the hemisphere.
Developing nations often encounter obstacles in their road to prosperity. What are they? Outdated educational systems, bureaucracy, corruption, and governments that restrict fundamental freedoms are some of the most important.
I believe that to overcome these and other barriers, a necessary precondition is true cultural change that is based on: education, the creation of companies, and innovation. Over the past 20 years, some Latin American countries have taken important steps on the road to development, but we must always ask ourselves, what can go wrong?
In this regard, Daron Acemoglu and James Robinson in their book "Why Nations Fail" offer us an interesting point of view on development, or the lack thereof.
I clearly disagree with some of the biased statements about Mexico, including an unfair comparison between Nogales, Sonora and Nogales, Arizona, as well as the comparison between Bill Gates with Carlos Slim.
Specifically, the book affirms that Slim’s fortune cannot be attributed to innovation but rather only to monopoly power, while for Bill Gates the former is the case. I think I see a certain amount of hypocrisy here, since worldwide there has been a discussion precisely on the issue of the monopoly power of Microsoft in the market for PC operating systems, a market worth many billions of dollars.
The privatization of Telmex, a giant state monopoly that provided terrible service to users two decades ago, was a good idea that was poorly executed. In my opinion, the privatization of Telmex was transparent, free of corruption, and orderly. Unfortunately, it has not resulted in the best outcome for Mexico because much of the company's monopoly power is still intact. It is a power that we still have to contend with, but which could diminish significantly with the new regulatory policies in the industry.
Nevertheless, I think there are some important lessons in their study. Namely, a country’s economic and political institutions are decisive for its prosperity, or its collapse. The authors note two basic types of such institutions:
- Extractive institutions, which generate privileges for the few with no social benefits;
- Inclusive institutions, which distribute and create positive incentives for a broader range of society.
Acemoglu and Robinson mention the encomienda system (in which the indigenous population toiled in conditions of servitude for the conquistadores), the Spanish colonial model, juche in North Korea, and apartheid as examples of extractive institutions that share centralized, bureaucratic, and authoritarian power structures.
Extractive institutions destroy wealth and distribute power among a small elite. Their existence is based on aversion to change and in this sense they are totally conservative.
These institutions are totally at odds with a key concept coined by Joseph Schumpeter: creative destruction, which occurs when innovation and technological advancement replace the old with the new and create political changes, transformative ideas, freedom, and development.
The historical example of transformation that they most clearly point to is known as the Glorious Revolution (England, 1688), which limited the authority of the king, increased the powers of Parliament, broke the monopolies of the crown, and abolished many taxes.
According to this book, the creation of a freer and more pluralistic society and the establishment of open economic institutions was the origin of the Industrial Revolution, from which we all benefited.
The competitive nature of inclusive institutions favors technological progress, business expansion, investment, and the efficient use of individuals’ creative capacities. It is no coincidence that the processes of industrialization and technological change go hand in hand with the creation of these types of institutions.
Although I do not agree with all the conclusions of this book, I haven’t the slightest doubt that in Mexico we need to build open institutions and put an end to the extractive institutions that have done us so much harm. A good energy reform would only be a first step in this direction.
It is clear that nations fail when their economic and political disparities prevent the well-being and prosperity of their citizens, when institutions become straightjackets, and when authoritarianism stifles innovation and limits individuals’ freedom. I have now come to the conclusion that excessive public spending and the relentless increases in taxes are also causes of the collapse of nations.
Cultural change and our eventual transition to development depend on our active participation as citizens. To avoid the collapse and achieve our nation’s prosperity, we must think and act, imagine a better future, and then find a way to achieve it.