Fixing Poverty

Daron Acemoglu describes what makes a nation rich in a new article for Esquire. According to Acemoglu, experts who believe geography or the weather or technology are to blame for persistent poverty are missing a much simpler economic explanation: people respond to incentives. “People need incentives to invest and prosper; they need to know that if they work hard, they can make money and actually keep that money,” he writes. “And the key to ensuring those incentives is sound institutions — the rule of law and security and a governing system that offers opportunities to achieve and innovate.” In other words, if you want to fix poverty, you’ll have to fix governments first. [%comments]


r edsley neoson daniel

the article is very optimistic but fails to address the points of colonialism and weapons proliferation that de-stabilize economies and regions as a cause of poverty in many regions of the world.

Caliphilosopher

And this is new? Haven't we known this for a while?

Jason

I can buy that governments play a key role in the prosperity of nations, but then circle back to the question of why progress-centered governments are less likely in certain areas. Are there geographic conditions that provide a greater/lesser incentive for these types of governments to form? Are there conditions that are more fertile for less progressive ruling styles? It seems that governments are as much an output as an input, and thus we still lack the fundamental cause of poverty.

Thomas

How very true. That is why our foreign aid program and that of almost every developed country and international institution are complete disasters. Despite the good intentions, these programs do nothing more than prop up corrupt governments and hinder real economic progress.

Joe Smith

"And this is new? Haven't we known this for a while?"

Indeed. In the 1160s Bishop Absalon built a fortification and sought to suppress bandits and pirates in a lawless and impoverished borderland. His imposition of law and order was so successful that the community around the fortification became knows as "Merchants' Harbor" - the root of its current name as one of the great, and most peaceful and prosperous, cities of the world.

Dorm girl

You can attribute religion for setting this kind of mindset., eg God will provide, Blessed are the poor, Greed is bad, etc.

Miguel

On one hand, I have to agree with the fact that governments play a key role in the development of a nation. On the other, rich nations benefit from keeping other nations poor such as African countries. Take for example, cheap oil from Nigeria, World Bank loans with optimistic forecasts that dont really payoff and sale of weapons by Asian countries to places like Zimbabwe and the so. This is no secret. As things get worse on one side of the trade, they get better on the other. Simple balance.

twenty-niner

Nations become wealthy because of innovation and technology. If it weren't for invention, we'd still be living in trees. The countries that innovate the best become the wealthiest. The latest stats:

Japan filed 994 patents per million people
South Korea - 779 patents per million
United States - 289
Sweden - 271
Germany - 235
France - 205

Of course, many factors contribute to how effectively a country innovates: education, culture, corruption, etc. But the outcome is clear - there is significantly more value in an LCD television that the bits of metal, silicon, and petroleum that go into it.

Owen

Yeah, never heard that argument before. Nevermind all the evidence that suggests other causes/solutions.

Martin

This seems like a catch 22 to me, if there's no way to make money except extorting bribes, it's hard to build a rule of law. Is there any society where the institutions came first, and the prosperity later?

Jason, for some interesting ideas around this, check "Guns, Germs and Steel" by Jared Diamond. Fascinating stuff.

jimi

"Fixing poverty"? That implies that poverty is corrently broken. Seems to be working just fine without fixing to me.

Joe Smith

"Is there any society where the institutions came first, and the prosperity later?"

England, Hong Kong, Singapore, Sweden, Denmark, Taiwan, Australia, the United States, Canada etc. etc.

Brutus

Let me suggest "A Farewell to Alms" -- it focuses on the Industrial Revolution - life before it (from 1200 to 1800), during it, and then life after it.

Most of us glossed over the Industrial Revolution in school, but it really was an extremely important event with regards to poverty, income, etc.

misterb

Well, if good governments make for wealth, than the US must have the best government as we are the wealthiest country. Kind of takes the wind out of the Tea party participants' sails, doesn't it?

twenty-niner

"Well, if good governments make for wealth, than the US must have the best government as we are the wealthiest country"

Wealthiest country?

US National debt: 12 Trillion
US Private debt: 16.7 Trillion
Mortgage debt: 14.4 Trillion
Personal debt: 2.4 Trillion
Credit card debt: 870 Billion

Social security liability: 14 Trillion
Prescription drug liability: 18.5 Trillion
Medicare liability: 73.7 Trillion
Total unfunded liability: 106.3 Trillion

We used to be wealthy until we recklessly de-industrialized. Now we are living on borrowed money, and borrowed time. Looks as if those tea partiers have a point.

Good governments only provide a legal framework for wealth creation. It's private enterprise, creating value where there was none, that actually generates wealth. Of course, if the government is corrupt and profligate in its borrowing, it can wipe away those gains and then some.

Kris

Hardly news. This view continues in the line of new institutional theory. Those who are interested in how such institutions form may enjoy "structure and change in economic history" by Douglass North (he won a nobel prize for it in 1993). Though the work of economists such as Acemoglu and Dani Rodrik have shown the empirical validity of these theories for modern nations.

Dave

Sounds like somebody has been reading 'The Bottom Billion' (Paul Collier) to me. If not, they should have been...

Gary

In other words, the safer you are from somebody (neighbor, stranger, government) stealing your possessions, the more prosperous you will be. Glad we've finally figured that out.

Betty Chambers

If it is culture, does that mean some societies are doomed to poverty forever? That changes any possible argument that sending funds from wealthy nations to poor corrupt nations would make any difference at all.

I'm curious as to when western wealthy countries started to discover that developing countries, years after the end of colonialism, are poor. Were the natives considered rich during the period of colonialism? How much net worth or wealth should a villager, peasant, or rural farmer have in his native land?

Is there an implicit vibe that these people are too stupid, and
corrupt, to manage their own affairs in the modern, complex, uneven, and capitalistic westernized world?

steven

yes people respond to incentives, the talented one's leave and move to economies that support this. this is the main reason for the catchup by europe post-war, because europe had the right institutions.

However geography is part of this. if the economy is distant, or lacks infrastructure, or is sparsely populated the rewards for innovation are much lower. hence those innovators move to countries with different geographies AND better institutions. you see this in america. talented people move to where the opportunities are. so some states fall behind while others surge ahead. If it was just about the institutions this would not be the case.

Better institutions alone are not the answer, changing geography with infrastructure and encouraging agglomeration etc is required also.