Why nations fail

By John Burton

I’ve recently been involved in a project by the Korea Development Institute on how the Middle East can learn from the Korean economic miracle. The study offers a wealth of examples from education reforms to industrial policies to explain Korea’s rapid rise to advanced economic status and how these lessons could be applied to Middle Eastern countries.

But are good ideas always exportable elsewhere? Frankly, I have my doubts after reading “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” by Daron Acemoglu from MIT and James A. Robinson from Harvard.

The book, which was published last year, argues that it is not geography, culture or ignorance of good policies that determines whether a nation succeeds or fails. Rather, it is the nature of its political and economic institutions that determines a nation’s future.

Acemoglu and Robinson’s central argument is that economies can only grow in a sustainable manner if there are institutional safeguards that guarantee that the fruits of investment and innovation will not be confiscated or plundered by the powerful. For that to happen, a nation’s institutional framework has to be both centralized and, more importantly, inclusive.

An inclusive society is a democratic and pluralistic one that allows popular participation in political decisions. This supports the development of a vibrant market-based economy because it protects property rights and encourages innovation and technology development. The elite cannot use their power to hold back the forces of economic “creative destruction” that leads to prosperity.

Unfortunately, inclusive nations tend to be the exception rather than the rule. More common in history are nations based on “extractive institutions,” where the interests of the elite prevail over those of the general public.

Extractive institutions benefit a narrow ruling elite by extracting resources and wealth, while providing few incentives for the public to improve their lot. The lack of popular participation creates social inequality and hobbles innovation. The elite resist political, economic and social change because it threatens their vested interests.

Eventually, extractive societies decline unless the elite decides to cede power to inclusive institutions because they recognize that not to do so would result in their violent downfall.

Acemoglu and Robinson cite the two Koreas as Example A to support their thesis. The same geography, the same culture, but two totally different outcomes due to the nature of their institutions ― an inclusive one in the South and an extractive one in the North.

So can South Korea’s successful lessons in economic development be applied to the Middle East, for example? Acemoglu and Robinson argue that the Arabic Middle East resists change not because of its Islamic values, but because the region still bears the imprint of the extractive institutions of the Ottoman Empire. Islam, after all, is the only religion to be founded by a merchant and its principles support fair economic distribution.

It is the Ottoman influence instead that encourages oil wealth to be concentrated in the hands of the elite, which uses it to support a lavish lifestyle rather than reinvesting it to support technological innovation and the growth of industries outside of the energy sector. The vested interests of the elite make it difficult to accept economic reforms because of fears the ensuing changes would undermine their power and status.

How did Korea escape a similar trap of being beholden to powerful vested interests when it entered the modern age? It is because Korea went through what Acemoglu and Robinson would call “a critical junction” in the first half of the 20th century that changed its historical trajectory. The Japanese colonial occupation wiped out the bureaucratic and aristocratic elite that had dominated Korea for 600 years under the Joseon Dynasty. Essentially, both South and North Korea started off with a clean slate in 1945 in trying to restructure their societies.

Unfortunately in the case of North Korea, it was the extractive Soviet Communist model that it emulated and which has gradually evolved to include elements of Korea’s previous neo-Confucianism authoritarianism.

For South Korea, the strong influence of the inclusive American economic model that plugged the country into the global market was the key to its success. Park Chung-hee may not have been an inclusive leader, but his successors realized that sticking to extractive political institutions was counterproductive to the country’s economic prosperity.

Switching from extractive to inclusive institutions is difficult. It has been argued that the remarkable longevity of the Joseon Dynasty was due to its isolation that helped stabilize the neo-Confucian elite structure. But when attempts at reforms were made in the late 19th century to prepare Korea to resist encroaching colonial powers, they triggered internal conflicts between modernists and traditionalists that weakened the country and made it more vulnerable to a takeover by the Japanese. North Korea is now facing a similar dilemma and the likelihood is that it will not end happily for the princes of Pyongyang.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at john.burton@insightcomms.com.