Why Other Nations Fail (But Australia Succeeds)
Is Australia’s success as a country dumb luck – or is it due to its
inclusive and democratic institutions?
The Globalist
January 25, 2014
By Tim Harcourt
There is always a lot of handwringing about our nation in the lead up
to Australia Day. Plenty of introspection and self-doubt about budget
deficits, productivity and other topics are typical for a nation of
worrywarts.
As Australia’s airport economist, I spend my career observing a
variety of different economies. At last count, I have been to about
58 countries in the past five years alone. Every time I return home,
I am amazed at how well the Australian economy stacks up, despite the
noisy pessimism in our nation’s media.
Can I really tell how things are in a country with a flying visit of a
few days? Well, you’ll never never know if you never never go – and
being an airport economist is preferable to being an armchair
economist.
Forget resources
But now, thanks to a recent book by two Harvard/MIT scholars, Daron
Acemoglu and James A Robinson, I have some solid back up for my
initial observations. In `Why Nations Fail,’ Acemoglu and Robinson
basically take a journey through the history of the world. Their
overriding question: Why do some nations succeed economically and
others have been disasters – even if they have similar climates,
historical cultures or endowments of natural resources?
The central thesis of their argument is that nations that build
inclusive and democratic political and economic institutions will do
better economically than nations that don’t.
>From that perspective, it doesn’t matter if a nation has an abundance
of mineral wealth and natural resources. Nations must also get their
institutions right – with democratic inclusivity, fairness and the
protection of property rights so citizens have the incentive to
invest, save and innovate.
Without that, any nation can squander its inheritance, no matter how
well endowed it is with natural resources.
A nation that got it right
And here’s the good news. In the `Why Nations Fail’ analysis, Acemoglu
and Robinson point to Australia as a nation that got it right.
First, in the convict era of the late 1700s, to overcome a shortage of
labor, the penal colony of New South Wales granted convicts the right
to be entrepreneurs and hire other convicts. As the colony developed,
the ambitions of the `squattocracy’ to deny others property and
democratic rights failed as inclusive political institutions were
developed.
In fact, by the mid-19th century, the Australian colonies were the
first place to introduce an effective secret ballot. The convict
colony was very different from the slavery of the Americas and
Africa. As a result Australia ended up developing more democratic
institutions than the old world.
Second, in the 1850s, at the Eureka rebellion in Ballarat in the
Victorian gold fields, inclusive institutions won again. As Acemoglu
and Robinson explain: `Instead of setting up a monopoly, Australian
authorities allowed anyone who paid an annual mining license fee to
search and dig for gold.’
By contrast, in Sierra Leone in Africa, extractive institutions denied
miners property rights and, mixed in with slavery, the result was
disaster under both colonial and post colonial rule. In Australia, the
Eureka diggers ended up being part of a democratic political movement
for universal suffrage and the secret ballot.
Third, later on, in the 1980s, as Australia hit a rough path in terms
of the shifts of the global economy, we reformed our institutions
while other nations languished or made things worse. Overcoming the
tyranny of distance
It has now been 30 years since the Australian dollar was
floated. This, together with a number of fundamental reforms by Bob
Hawke and Paul Keating and colleagues (with the support of John Howard
in the opposition), enabled Australia to prosper in the Asian
Century. Crucially, it turned our historical `tyranny of distance’
position into `the power of proximity.’
As Acemoglu and Robinson show, the contrast between Australia and
Argentina, a similarly resource-endowed southern hemisphere economy,
couldn’t be greater. A century ago, both Argentina and Australia (and
Buenos Aires and Melbourne in particularly) were two of the richest
nations in the world.
But while Australia developed inclusive institutions and resisted the
squattocracy, Argentina allowed land-owning oligarchs to
flourish. Extractive and exclusive institutions forced the mass of the
population to support Peronist policies.
Australia versus Argentina
In recent times, Australia had a market-determined exchange rate,
which enabled our economy to have a shock absorber while we reformed
our economic structures. In contrast, Argentina fixed the peso to the
US dollar, making exports too expensive and imports cheap. That
choice, coupled with debt and default, destroyed confidence in
Argentina’s institutions and belief in their property rights and the
banking system. Now, Argentina knows it needs to rebuild trust and
confidence in its institutions. Otherwise, it cannot take full
advantage of its natural resources and highly educated sophisticated
workforce.
The lessons for the future
As Acemoglu and Robinson point out, for nations to succeed, they need
to defend and constantly improve their inclusive institutions.
The authors note that the United States’ institutions came under
attack from the `Robber Barons’ in the late 19th/early 20th century
and it took some strong anti-trust legislation and a free media to
resist this.
Australia should be wary of our own `Robber Barons’ (or 21st century
squatters) trying to take monopoly rights over not only resources, but
also the media itself.
As Acemoglu and Robinson show, Australia needs to continue to develop
institutions that protect property rights and enable a fair sharing of
our mineral wealth. We should therefore avoid weakening inclusive
institutions that have helped maintain both efficiency and fairness in
our economic system to the benefit of both capital and labor.
Australia is not perfect – far from it, especially in terms of
disadvantages for indigenous people and the need to support
reconciliation. But as `Why Nations Fail’ shows, we have developed the
right institutions that could build a future Australian nation that
could really be a lucky country for all.
Happy Australia Day.