How to avoid epic fail

Feel fortunate, Filipinos, that plenty of economic models out there are way more dysfunctional than that of the Philippines.

Daron Acemoglu and James Robinson’s Why Nations Fail: The Origins of Power, Prosperity and Poverty, an epic study of policies that work and those that suck, does not touch upon the Philippines specifically. But there are plenty of lessons that could be applied to this country. The two professors  one from MIT and the other from Harvard  have written an insightful analysis of economic models that work and those that fail.

The book opens on a sharp disparity: a divided town at the US/Mexican border called Nogales, which was split in two after the Spanish-American war. As they point out, on one side of Nogales, in Arizona, the average annual income is $30,000; on the other side, a few hundred meters south, it’s less than $8,000 a year, infant mortality rates are high, and lifespans are much shorter.

In the past, economists looked at geography or cultural differences to explain such disparity. Acemoglu and Robinson find a deeper vein: political and economic institutions laid down centuries ago which are either “extractive” or “inclusive.” To sum it up: “Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest and innovate.” And further: “Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction.”

In the case of Mexico and South America, chalk it up to centuries of colonial expansion under Spain, and the legacy of political models left behind. When Spanish conquistadors like Cortes visited South America starting in the 15th century, the plan was pretty simple: find the native leaders, capture them and demand submission from awestruck indios. If the local populations fought back too hard, the conquistadors simply relocated to more passive populations and started cracking heads again. Then they would use the local natives as slaves to extract as much gold as could be found  for gold was the only thing on Spain’s mind at the time. This rapacious model of conquest and extraction guided all the colonial powers, including those sailing toward Asia and North America in coming years. It left behind centuries of populations with no idea how a functioning democracy could ever work or benefit them.

Does this sound familiar? Many gripe that the power seized by President Ferdinand Marcos for so long allowed him to institutionalize corruption up and down the economic chain of Philippine government. No wonder government institutions can’t stay clean! Others say the corruption is a hangover from the governments devised by Spain or the US when the Philippines was still a commonwealth; still others say the corruption was perfected under the very first Philippine Congress, long before Marcos.

Though the authors do not directly comment on the Philippines, one can extrapolate. The Philippines is something of a mixed bag of colonial legacy and democratic institutions. Centuries of colonial policies have set the tone, systems of utang na loob put into place, leading to political dynasties.

Yet there is a system of democracy in place, in the form of a constitution. Individual economic advancement is possible, though many at the top in fact possess the means to sidestep the rules. And if leadership holds the institutions to a model of honesty and accountability  as President Aquino seems to be doing  one does see signs that the economy responds favorably.

The authors contrast the Spanish extraction tactic with what happened when English and Dutch explorers tried to settle the New World, or what became North America. The scattered Native Americans tribes fought back hard. Subduing them was no easy feat. And there was no gold to be had anywhere. The colonials had to rethink things. Native crops  tobacco, corn, and later cotton  became their “Plan B.” A system of mutual accommodation had to be devised to work with Native American leaders. If it was never as idyllic as a Norman Rockwell Thanksgiving painting, it did at least keep peace for settlers  until the decimation of native populations during the later pioneer expansion westward.

Not too surprisingly, Acemoglu and Robinson still see the US as a good model of inclusive economic and political institutions. Especially compared to places like, say, Zimbabwe or Sierra Leone. While Asia booms and growth among First World countries in North America and Europe has seemingly crawled to a halt, the authors say: Hold on a minute. Let’s wait and see. America is still solid, viable, built upon a model of openness and accessibility that will keep it a contender for any foreseeable future.

Example: two of the richest men in the world are Bill Gates and Mexican Carlos Slim, who owns Telemex, a huge telecom monopoly. Slim was reportedly able to acquire the government-owned telecom even though he wasn’t the highest bidder; he then used government connections to shut out any competitors, in effect becoming the only telecom player in Mexico. In contrast, Bill Gates created a vast software empire, Microsoft, but when the US government found it to be monopolistic, they tried him in court; Gates lost and had to pay a huge fine.

One doesn’t have to dig too deep to see that the institutions of one country level the playing field while that of the other cements power into the hands of the elite.

Is there hope for countries tangled in decades or centuries of extractive institutions? The authors point to examples: Botswana, which transcended its repressive chiefdoms and colonial dependence to become inclusive; Deng Xiaoping, who overhauled half a century of rigid communist dogma and opened markets in China; and the American South, which finally allowed blacks to vote and get equal education in the 1950s despite centuries of extractive practices.

Perhaps America’s geopolitical model abroad needs a rethink: certainly, a century after colonialism withered and faded away, it might be wise to redefine America’s role as a wholesale exporter of democracy. Yet the very institutions at home that allowed the United States’ unparalleled growth in the 20th century  democratic elections, an open economy  are more or less still in place. Even if you do believe everything depicted in Inside Job.

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Why Nations Fail: The Origins of Power, Prosperity and Poverty by Daron Acemoglu and James Robinson is available at La Solidaridad and National Book Store.