This book was an interesting read for everyone who is curious to know why some nations are rich and why some are poor? This book is a must-read for all those who work for the welfare of the people of the country. It gives a compelling perspective about the origins of power, prosperity, and poverty. In fact, everyone who is interested in public policy, they must read this book to get ideas how to change or modify policies/institutions at a critical juncture to create a path towards prosperity for a nation. We can look for a better example in our own South Asian Sub-continent in terms of the evolution of India and our neighboring countries. Why Indian democracy despite its various flaws is still flourishing? Why other countries in the Sub-continent are still not able to achieve a substantial form of liberal democracy? That is also interlinked with our economic growth and progress as well as reduction of poverty.
It is a hot topic of discussion and debate to find out the reasons behind poverty. Not only this, in the process, policymakers and leaders are eagerly waiting to know the real formula to bring about prosperity for their people. We live in an unequal world. There is a massive amount of inequality prevalent among nations of the world. Why it is so? Why one person in “developed north” lives healthier and prosperous life and another one in “developing south” lives a miserable life with no health and security? This inequality is not only prevalent between countries but also there within a country also. The stark inequality is not only impacting the lives of poor but also creating grievances and resentment among the people of Western countries of the USA and the European Union. The election of Trump as US president, Britain’s exit from the European Union, Islamophobia, Migration crisis, and anti-migration rhetoric are some of the symptoms of the real problem.
The authors of the book have also discussed and refuted various theories regarding origins of poverty and prosperity before giving their own theory of “INSTITUTIONS”:
- The Geography Hypothesis claims that geographical differences create poverty and prosperity. Montesquieu, the French philosopher propounded this theory. He argued that people in tropical climates tend to be lazy and lack inquisitiveness. The modern version of this theory says that tropical diseases have adverse consequences on health and labor productivity.However, we have a lot of examples from past as well as present to refute this theory. We had a lot of great civilizations(INDUS valley, INCA civilization) in tropical areas and developed countries like Singapore and Malaysia in tropical areas. Nogales , Arizona(US) and Nogales, Sonoro (Mexico) are very close to each other but they are different not because of their geography but because of the border existing between the two countries which separate them to live in different institutions.
- The Cultural Hypothesis relates prosperity to culture. Max Weber argued that the Protestant Reformation and Protestant Ethic played a key role in the growth of Western Civilization. It can also be refuted by seeing the countries of Japan, Singapore, South Korea and China. They have different cultures as compared to western countries. North Korea and South Korea had same cultures till 1950. However, today both the nations are far apart not because of their culture but they have different kinds of institutions after their division.
- The Ignorance Hypothesis asserts that world inequality exists because we or our rulers do not know how to make poor countries rich. However, it is also not true because it is not that some leaders do not know things but it is something else. As per the author, poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose.
- Here comes the theory, given in this book- Theory of Institutions. As per the authors, institutions matter a lot. They shape not only the destiny of the particular country but also influences the world. Institutions can be of two types: political and economic institutions. In fact, both are interlinked. The poverty and prosperity is the interplay of political and economic institutions. What kind of political and economic institutions are created/formed in the country decide about the future of the nations? There are two kinds of Economic Institutions- Inclusive as well as Extractive Inclusive Economic Institutions foster economic activity, productivity, and prosperity. They also pave the way for two other engines of prosperity-Technology and Education. Similarly, Inclusive Political Institutions are pluralistic and centralized enough to create a peaceful climate for people to pursue their ideas.
On the other hand, Extractive Political Institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Extractive Economic Institutions naturally depend and sustain the Extractive Political Institutions. They both are interlinked. The real thing is that we and our leaders get the opportunity to decide about these institutions at the critical juncture of history. For instance, Black Death(Bubonic Plague) has created the ground for new and progressive economic and political institutions to emerge in England. On similar grounds, we can see our Independence and formation of our constitution in 1947-1950 was a critical juncture for our country. It can also be related to the present situation in India. The NDA government led by Mr. Modi, our Prime Minister got a massive majority in 2014 election. It was a critical juncture and opportunity provided to leaders of the country to usher into a radical transformation of our politics and economics to create prosperity for Indian people.
It means that history also plays an important role. In fact, Institutions are formed at the critical juncture to decide about the future of the country. But the real question is that why not always choose prosperity? Because some leaders want to become rich themselves rather than making their country rich. The colonial legacy also played a role here. Colonies were exploited by the colonial masters for their own benefits. Not only this, they established various institutions to perpetuate disparity and poverty in the colonized countries. We can see the examples of this legacy in Sub-Saharan African and the Middle East countries.
So what needs to be done?
Extractive Political and Economic institutions must be replaced by Inclusive Political and Economic Institutions. At every critical juncture, the people, as well as leaders of the country, must embark on a journey to create inclusive institutions to create prosperity in the country. For instance, our country is at a critical juncture when our “demographic dividend” is so high and our country is a fastest growing economy in the world, we must seize the moment to create bountiful opportunities for the youth of the country.