Rich man, poor man

NEVIL GIBSON
Last updated 05:00 10/12/2012

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Why nations fail by Daron Acemoglu and James Robinson. Profile Books paperback $39.99

Popular explanations for Western societies becoming rich over the past two centuries, while others have dismally failed, usually focus on geography and culture.

Evolutionary biologist Jared Diamond (Guns, Germs and Steel), emphasised the importance of temperate climates in food production, allowing crops and livestock to replace hunting and gathering. David Landes (The Wealth and Poverty of Nations) was another who focused on technology, nutrition and hygiene, but also why those developed in certain cultures and not others.

These factors are superceded in Acemoglu and Robinson's new study. It narrows the reasons to institutional economics — how societies are organised politically and how this produces outcomes. It does so using detailed contrasts of societies with vastly different wealth.

Such disparities are found between the US and Mexico, providing the book’s main scene setting. They are followed through with historical precedents and recent examples.

In essence, the difference is between societies organised so that wealth that flows to benefit an elite and those that allow wider participation.

The former, which is the historic norm and still widely practised through restricted land ownership, is a parasitical system that discourages investment and innovation.

The other model arose in England with the limiting of the monarchy's power over land and then trade, leading eventually to the industrial revolution.

While the Chinese and other civilisations had greater wealth and populations, they were no match for a form of a capitalism that spread wealth and power, encouraging investment in new industries and activities without political inhibitors.

The biggest impact today is seen in the legacies of respective European colonial powers. While all these empires were largely exploitative, the American colonies were the first to overthrow the model of paying economic tribute to the ruling elite.

By contrast, the Spanish and Portuguese colonial system remained unchanged and largely prevails to this day in Latin America.

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