Whys and Wherefores of Prosperity

As in the unhappy families of Tolstoy’s fame, each of the poor countries is unhappy in its own way. The mystery of prosperity is something that has intrigued innumerable scholars and philosophers. What is it that makes some countries prosper while others remain poor?

The discussion with respect to prosperity is vast and interminable and each has their own theory. The paradox is that the most appealing proposals tend to derive not from scholars or statesmen but from interested parties. For an industrialist prosperity is (nearly) always the product of governmental support in the form of tariff protection or subsidies. For a bureaucrat there is no means to prosperity other than the public expenditure. Caricatures no doubt, but suggestive of the manner in which each procures justification of their preferences with an insignia that disguises the pecuniary or political interest that lies in back of it.

But the scholars are notfar behind. Two recently published books attempt to explain the phenomenon of development and prosperity. Very distinct in focus, they provide perspectives that contribute to understanding what development is. They also show, perhaps without having proposed to do so, how difficult it is to achieve it.

In Why Nations Fail: The Origin of Power, Prosperity, and Poverty, Robinson and Acemoglu ask themselves why some societies are democratic, prosperous, and stable, while others are autocratic, poor, and unstable. Perhaps no question is more transcendent for nations attempting to achieve development, although the manner in which they formulate the question already suggests a problem: at least the case of China might appear on both sides of the equation.

The argument of these scholars is that the bottom line in development is not economic but political: it is the institutions that establish the rules of the game and that create incentives that determine the way the population will act. From this premise they elaborate an interesting approach: there are two types of economic institutions, those that are “extractive” and those that are “inclusive”. The extractive ones guarantee the prosperity of a few at the expense of all of the others. The inclusive ones favor the participation of all under the same conditions. Slavery and feudalism illustrate the former case, while market systems subject to a rule of law comprise the prototype of the latter.

According to the authors, the nature of these institutions is determined by the conformation of each nation’s political structure. The deciding characteristic of inclusive institutions is the combination of centralization and pluralism: the State should be sufficiently strong to contain the power of the private interests but, at the same time, to be controlled by mechanisms of political authority widely disseminated by the society: checks and balances. In the absence of any of these components, the political arrangement becomes extractive, thus exclusive.

The thesis of the book ends up being very simple: extractive political institutions generate extractive economic development models, while inclusive institutions will generate inclusive models. The crucial moment in history at which differentiation between these two models was achieved took place when in 1688 the British Parliament imposed itself on the authority of the king, giving way to the Industrial Revolution. Maybe the most interesting, but also fragile, part of the argument is that which attempts to explain the case of China: an autocratic nation and one that, however, has achieved high growth rates and a rapid decrease in poverty indexes. Their explanation is that China is an extractive nation that sooner or later will encounter a limit to its growth if it does not achieve a transition to therule of law.

Niall Ferguson adopts a historical perspective. In his book Civilization: The West and the Rest, Ferguson contends that the reason that Western nations achieved the prosperity that characterizes them has to do with a series of“killer apps” that came together to produce a source of immense wealth: competition; the scientific revolution; the rule of law and the representative government; modern medicine; the consumer society, and the work ethic. “For hundreds of years, these “killer applications” were essentially monopolized by Europeans and their cousins who established themselves in North America and Australasia. They are the best explanation for what economic historians call “the great divergence”: the astonishing gap that arose between Western standards of living and those in the rest of the world. In 1500 the average Chinese was richer than the average North American. By the late 1970s, the American was more than 20 times richer than the Chinese.”

In contrast with Robinson and Acemoglu, Ferguson has a richer explanation for the case of China and other nations: “Beginning with Japan, however, one non-Western society after another has worked out that these applications could be down-loaded and installed in non-Western operating systems. That explains about half the catching up that we have witnessed in our lifetimes, especially since the onset of economic reforms in China in 1978.” The result is that prosperity has multiplied in ever more diverse latitudes.

Both perspectives offer angles that allow for better understanding of the lacks and absences in our own process of development. There is no country that does not experience contradictions and undergo difficulties. In fact, Ferguson’s book is directed at Americans, summoning them to revert the process of deterioration of these six “killer apps”. According to this author, the risk for the West, above all for the U.S., is that the “pupils” end up being much more skillful, thus much more successful.

On reading these two books the argument came to mind of another scholar, Nathan Rosenberg, who in the eighties published a book entitledHow The West Grew Rich. His argument was scathingand perhaps more simplistic but no less powerful. “The West’s sustained economic growth began with the emergence of an economic sphere with a high degree of autonomy from political and religious control.” In other words, prosperity flourished when the State stopped imposing its preferences on the economic actors and was limited to whatRobinson and Acemogluput forth: a State capable of containing private interests while simultaneously being controlled by effective checks and balances.


As the contradictions ofChina illustrate, there is no way to achieve prosperity overnight. What can be done is to go about constructing it. It is this intentionality that has been absent in Mexico lately.