Ever wondered why some nations are rich while others are poor? Want to delve into the roots of global inequality and the patterns that lie beneath? Interested in the roles of historical events like the Industrial Revolution, the French Revolution, or the division of Korea in shaping economic trajectories? Curious about the choices made by leaders in countries like Sierra Leone, Zimbabwe, or North Korea that perpetuated poverty? Dive in to unravel the mysteries of world inequality and the pivotal role of political and economic institutions in a nation's fate.

Why Nations Fail: The Origins of Power, Prosperity, and Poverty

Nogales, a city divided by a fence, provides a stark example of the economic disparities that exist in the world. On one side, in Arizona, citizens enjoy a decent standard of living; on the other side, in Sonora, Mexico, people struggle with poverty. These contrasting realities are not due to geography or culture, but to the differing political and economic institutions that govern each side. 

In the United States, democratic institutions and competitive markets incentivize citizens to become educated, innovate, and invest - leading to economic prosperity. In contrast, Mexico's political and economic systems have been historically monopolistic and exploitative, stifling growth and maintaining inequality.

Institutions shape the economic and political landscape of a nation, determining what opportunities are available to its citizens and how wealth is distributed. For instance, the United States had a banking system that encouraged competition and innovation, leading to a prosperous economy. Mexico, however, had a banking system controlled by the elite, resulting in a stagnant economy.

Moreover, the political institutions in a country determine the rules that govern economic institutions. The United States' democratic political system, which holds politicians accountable to citizens, enabled the development of competitive economic institutions. In contrast, Mexico's political institutions allowed for the concentration of power in the hands of a few, leading to monopolistic economic institutions.

The story of Bill Gates and Carlos Slim, two of the world's wealthiest men, illustrates how different institutions create different economic outcomes. Gates' success was facilitated by the United States' competitive market environment, strong rule of law, and access to capital. Slim's fortune, however, was built in a monopolistic environment with little competition and high entry barriers. 

Institutions, therefore, are key to understanding global inequality. While they can persist and be difficult to change, recognizing their role is the first step towards improving the lives of those living in poverty. The interaction between political and economic institutions determines a nation's trajectory, and they must be reformed together for meaningful change.

Can the Tale of Bill Gates and Carlos Slim Explain the Global Economic Disparity?

The spark of continuous economic growth was first lit in England during the second half of the 18th century with the advent of the Industrial Revolution. This growth spread across Western Europe and the United States, as well as Britain's colonies - Canada, Australia, and New Zealand. Today, these nations, along with Japan, Singapore, and South Korea, are among the richest.

At the opposite end of the spectrum, the poorest nations are primarily found in sub-Saharan Africa, along with Afghanistan, Haiti, and Nepal. Despite shifting global dynamics, the list of the wealthiest and poorest nations has remained relatively consistent over the last century and a half.

Looking at the Americas, the wealth divide is clear. The United States and Canada significantly outstrip Latin American nations in terms of prosperity. Within Latin America itself, there's a stark divide between rich and poor countries. Similarly, the Middle East paints a varied picture, with oil-rich nations like Saudi Arabia and Kuwait enjoying high income levels, while those without oil, like Egypt, Jordan, and Syria, languish in poverty. 

Many theories have been proposed to explain these disparities. The geography hypothesis attributes poverty to geographical differences, while the culture hypothesis ties prosperity to culture. Another theory, the ignorance hypothesis, argues that world inequality arises from a lack of knowledge on how to eliminate poverty.

However, these theories fall short in explaining the reality of world inequality. For instance, the geography hypothesis fails to account for the prosperity of nations located in the tropics, such as Singapore and Malaysia, or to explain why nations with similar geographical conditions experience different levels of wealth.

Similarly, the culture hypothesis, while acknowledging the influence of social norms, cannot explain why nations with similar cultural backgrounds, like North and South Korea, have such disparate levels of wealth. Nor can it provide a convincing explanation for the reversal of fortunes witnessed in history.

The ignorance hypothesis also fails to hold water. Economic mismanagement and poor policies are often not the result of ignorance, but rather the result of leaders responding to political incentives and constraints. For instance, the economic policies adopted in Ghana after independence were not due to ignorance of better alternatives, but a political strategy to secure power.

In essence, to truly understand global inequality, we must go beyond economics and delve into politics. Decisions made by those in power, their motivations, and the political processes they navigate are the key to unlocking the mystery of world inequality. We must recognise that poor countries are not poor because of mistakes or ignorance, but because those in power make choices that perpetuate poverty.

Unraveling Global Inequality: The Power Politics Behind Rich and Poor Nations

In 1945, as World War II ended, the Japanese colony in Korea collapsed, leading to the division of Korea into two zones: South Korea, overseen by the United States, and North Korea, controlled by Russia. This event sets the stage for a story of economic divergence that perfectly illustrates the argument that the prosperity or poverty of a nation is largely determined by its economic and political institutions.

In South Korea, under the leadership of Syngman Rhee and later General Park Chung-Hee, economic institutions were structured to encourage private investment, industrialization, and technological innovation. Despite authoritarian rule, South Korea's market economy thrived, and its citizens enjoyed a standard of living akin to that of Spain or Portugal.

In contrast, North Korea under Kim Il-Sung established a rigid, centrally planned economy, outlawed private property, and restricted freedoms. The result was an economic disaster. Today, the average North Korean can expect to live ten years less than his southern counterpart, and the country's living standards are roughly one-tenth of South Korea's.

This disparity is not due to geography, culture, or ignorance, but to the difference in institutions. Inclusive economic institutions, like those in South Korea, allow and encourage participation by the majority of people in economic activities, providing secure private property, an unbiased system of law, and public services. Extractive economic institutions, like those in North Korea, are designed to extract wealth from one subset of society to benefit a different subset.

The story of the two Koreas also reveals the interplay between economic and political institutions. Inclusive economic institutions are often supported by inclusive political institutions, which distribute power broadly and impose constraints on its exercise. Extractive economic institutions, on the other hand, usually accompany extractive political institutions, which concentrate power in the hands of a narrow elite.

While extractive institutions can sometimes generate growth, they typically don't lead to sustained economic progress. The Soviet Union and modern China are cases in point. Both managed to achieve rapid economic growth under extractive political institutions, but this growth was limited and largely state-driven.

Economic prosperity is not just about having more and better machines, or a better-educated workforce. It's about having inclusive economic and political institutions that create the right incentives for economic activity, innovation, and progress. Without these, a country is likely to remain stuck in a cycle of poverty and stagnation.

How Did Economic and Political Institutions Influence the Divergent Paths of North and South Korea?

In the 14th century, the Black Death devastated Europe, wiping out about half of the population in affected areas. The plague, which originated in China and spread via trade routes, was a major event that disrupted the existing social, economic, and political balance in society. This critical juncture led to dramatic changes in the institutions of society.

However, the impacts of the plague varied across different regions. In Western Europe, the scarcity of labor caused by the plague led to the breakdown of the feudal system, as peasants demanded better conditions and wages started to rise. This eventually led to the emergence of inclusive labor markets and an increase in wages.

In Eastern Europe, however, the situation was different. Despite the similar demographic impact of the plague, the social and economic forces at play were different. The scarcity of labor led to the intensification of the extractive labor market and the servitude of peasants. Over time, this led to a divergence in the institutions of Western and Eastern Europe.

The different responses to the same event highlight the importance of existing institutions in shaping the path of economic and political development. Small differences in the initial institutions can become consequential when they interact with a critical juncture, creating a path-dependent process of institutional development.

This understanding of history and critical junctures can help explain the origins of differences in poverty and prosperity across nations. It can also shed light on why some nations make the transition to inclusive economic and political institutions while others do not. 

Inclusive institutions, which provide a level playing field and allow individuals to exercise their talents, can lead to sustained economic growth. On the other hand, extractive institutions, which concentrate power and wealth in the hands of a few, can only generate growth for a limited period.

Institutions can change, and societies can break out of the vicious cycle of extractive institutions. However, this often requires a critical juncture—a major event or confluence of factors that disrupts the existing economic or political balance in society. The transformation also requires a broad coalition that can challenge the existing power structure and push for more inclusive institutions.

However, the path to inclusive institutions is not guaranteed. Critical junctures can also lead to the intensification of extractive institutions, as was the case with the Second Serfdom in Eastern Europe. The outcome depends on the balance of power and the existing institutions at the time of the critical juncture.

Black Death and Beyond: How Critical Junctures Shape Economic and Political Institutions

At the northern end of the Adriatic Sea, the islands forming Venice were once the wealthiest place in the world. Its economic success was due to its strategic location for trade and the inclusive economic institutions established, such as the commenda, a primitive form of joint-stock company. 

However, over time, the political and economic inclusiveness declined. The once thriving trading hub became more and more exclusive, with the elite consolidating their power and wealth, and eventually banning the commenda. This transformation, known as the "La Serrata" (The Closure), led to the economic decline of Venice, turning it into a museum-like city, dependent on tourism.

Institutions in different parts of the world have evolved in various ways due to different historical development. England, a relatively insignificant player during the Roman Empire, would later become the birthplace of the Industrial Revolution. 

The fall of the Western Roman Empire led to the rise of feudalism, which in turn created a set of institutions where the political powers of rulers were weakened. This set the stage for the development of inclusive institutions.

The industrial growth in England was made possible by its unique inclusive economic institutions which were built on the foundations laid by the inclusive political institutions established during the Glorious Revolution. These institutions, which protected property rights, improved financial markets, undermined state-sanctioned monopolies in foreign trade, and removed barriers to the expansion of industry, gave entrepreneurs the opportunity and incentive to develop their skills and ideas. 

The inclusive nature of these institutions allowed for creative destruction, redistributing not just income and wealth, but also political power. 

However, the Industrial Revolution did not start in England by chance. Political conflicts between absolutism and its opponents, the emergence and empowerment of diverse interests, and the expansion of trade into the Atlantic played crucial roles. 

The Glorious Revolution was a significant event as it empowered a broad coalition and established a constitutional regime with constraints on the power of the executive and any one of its members. This broad coalition was essential in preventing attempts by one group to create a monopoly at the expense of the rest. 

Could the Shift from Inclusive to Extractive Institutions Be the Downfall of Prosperous Economies?

In 1445, Johannes Gutenberg transformed the world by unveiling a printing press in Mainz, Germany. This technological breakthrough radically changed the accessibility of information, enabling mass literacy and education. Many countries quickly recognized the importance of the press and adopted it. By the late 1460s, the technology had spread throughout Italy and by 1476, London had its own printing press.

However, not everyone embraced this innovation. The Ottoman sultan Bayezid II, for instance, expressly forbade Muslims from printing in Arabic as early as 1485. This ban persisted until 1727, when Sultan Ahmed III allowed İbrahim Müteferrika to set up a press. Yet, even this was closely monitored and restricted by religious and legal scholars. As a result, Müteferrika's printing press produced only a few books.

The opposition to the printing press had significant consequences for literacy, education, and economic success. In 1800, only 2 to 3 percent of Ottoman Empire’s citizens were literate, compared to 60 percent of adult males and 40 percent of adult females in England. This gap was a direct result of the Ottoman sultans’ fear of the disruptive power of knowledge.

Similarly, the Industrial Revolution marked a critical juncture that affected almost every country. Nations with inclusive institutions, such as England, that encouraged commerce, industrialization, and entrepreneurship, grew rapidly. However, absolutist regimes, such as the Ottoman Empire, China, and Russia, lagged behind as they blocked or did nothing to encourage the spread of industry.

Spain and Ethiopia are examples of nations where absolutist control of political institutions stifled economic progress. Spain's economic institutions were extractive, organized to make the monarch and nobility as wealthy as possible. The Spanish monarchy not only monopolized trade but also sold offices and immunity from justice, leading to economic decline. Similarly, Ethiopia's absolutist rulers blocked industry and economic progress, locking in economic backwardness and poverty for most Ethiopians.

On the other hand, societies that lacked political centralization, like Somalia, were also disadvantaged. Somalia's clan-based society was locked in continual conflict over scarce resources. The absence of a centralized authority to enforce law and order made it impossible for Somalia to benefit from the Industrial Revolution.

Printing Press and Industrial Revolution: How Politics Dictate Technological Adoption and Economic Success

The Moluccan Archipelago in modern Indonesia was once the center of world trade due to its exclusive production of valuable spices like cloves, mace, and nutmeg. The first contact with Europeans was in the 16th century, with Portuguese mariners who came to buy spices. This was followed by the Dutch who attempted to monopolize the spice trade, leading to the creation of the Dutch East India Company. 

The Dutch systematically exploited the islands and their inhabitants, leading to the islands' underdevelopment. Economic and political change in Southeast Asia was halted by the aggressive dominance of the Dutch East India Company. 

Similarly, the dynamics of exploitation and economic control were evident in the slave trade in Africa. Intensified by the development of sugar plantation colonies in the Caribbean, this trade led to a dramatic increase in the importance of slavery within Africa itself. The slave trade initiated two adverse political processes - the rise of absolutist states focused on raiding and slaving, and the ultimate destruction of state authority due to continuous warfare. 

The South African state created a dual economy - a modern, prosperous part for the Europeans and a traditional, poor part for the Africans. This was implemented to create a reservoir of cheap labor for European businesses and reduce competition from black Africans. 

On the other hand, the French Revolution led to the abolition of the feudal system, the imposition of taxes on all citizens, and the removal of barriers for Africans to enter any trade. The French revolutionary armies imposed radical reforms in the lands they conquered, abolishing the remaining vestiges of serfdom and imposing equality before the law. 

All these historical events and their economic repercussions have significantly contributed to the current world inequality. Countries that embarked on industrialization and technological change in the 19th century are generally wealthier than those that did not.

Did Historical Events Like the Spice Trade and the French Revolution Contribute to Today's Global Inequality?

In the early 18th century, England was marred by lawlessness and violence, particularly by groups known as the "Blacks", local men who had their faces “blacked” to conceal their appearance. They were notorious for their illegal hunting, destruction of property and blackmail. 

This was not simply criminal behavior; it was a rebellion against the growing power and exploitation by the political elites known as the Whigs. These events led to the implementation of the Black Act in 1723, which introduced fifty new offenses punishable by hanging, including carrying weapons and having a blackened face. 

However, this harsh legislation failed to curb the rebellion and resistance continued. This resistance highlighted the emergence of the rule of law in England, a crucial outcome of the Glorious Revolution of 1688. This notion implied that laws should not be applied selectively or arbitrarily, and that nobody is above the law. 

The rule of law is a strange concept in historical perspective. It assumes that laws should be applied equally to all, regardless of their status or power. This is inconceivable under absolutist political institutions. It is a creation of pluralist political institutions and broad coalitions that support such pluralism. 

The evolution of the British political system saw a gradual but consistent progression towards greater inclusiveness and democracy. The process was marked by persistent challenges and struggles, but the 'virtuous circle' of inclusive institutions persisted. Each step towards greater democracy was small and gradual, which made it less threatening to the existing elites and more durable. 

The virtuous circle is a powerful process of positive feedback that strengthens inclusive institutions and resists attempts to undermine them. It is based on the premise that inclusive institutions are rooted in constraints on the exercise of power and a pluralistic distribution of political power in society. The ability of a subset to impose its will on others threatens this balance. 

The American experience in the first half of the 20th century also underscores the important role of a free media in empowering broad segments of society and thus in the virtuous circle. Free media helps to expose the excesses of powerful elites and corruption in politics, which in turn induces politicians to take action against such abuses. 

The 'Robber Barons' of the late 19th and early 20th century in the US were a classic example of power abuse. Their monopoly trusts were eventually broken up by politicians committed to reform and limiting their power. 

From Rebellion to Democracy: Emergence of Inclusive Institutions and the Rule of Law in England and America

The West African nation Sierra Leone, a British colony since 1896, was initially made up of various African kingdoms. Over time, the British extended their rule into the interior, often through treaties with African rulers. One such ruler, King Suluku, was made Paramount Chief Suluku by the British, a title that carried significant administrative responsibilities.

However, the kings who signed treaties with the British did not fully grasp the implications of these agreements. This led to a tax uprising in 1898, known as the Hut Tax Rebellion. Although it was quashed swiftly, it highlighted the challenges the British faced in controlling Sierra Leone.

The British had begun building a railway into the interior of Sierra Leone to consolidate their control. However, the rebellion disrupted this project. Eventually, the British redirected the railway towards the heart of the rebellion, Mendeland, in an effort to quell future uprisings.

When Sierra Leone gained independence in 1961, the British handed power to Sir Milton Margai and his Sierra Leone People’s Party (SLPP). However, in 1967, the SLPP lost a close election to the All People’s Congress Party (APC), led by Siaka Stevens, a northerner. Stevens saw the railway, which was a lifeline for the southern Mende people, as a threat to his power. So, he dismantled the railway to Mendeland, crippling some of Sierra Leone's most vibrant economic sectors.

Stevens’ actions were a prime example of Africa's post-independence leaders choosing to consolidate power over encouraging economic growth. His actions resembled those of Tsar Nicholas I, who feared railways would bring revolution. Like many rulers in control of extractive institutions, Stevens was willing to sacrifice economic growth to thwart political challenges.

After independence, the extractive institutions created by the British persisted. In fact, they worsened, with the extraction of farmers using marketing boards escalating. The traditional systems of land ownership, coupled with the unfavorable policies of the marketing boards, explained the low agricultural productivity in Sierra Leone and much of sub-Saharan Africa.

Did British Colonialism and Post-Independence Power Struggles Shape Sierra Leone's Economic Trajectory?

In January 2000, Zimbabwe's national lottery took an unexpected twist when President Robert Mugabe, the iron-fisted ruler since 1980, won the grand prize of 100,000 Zimbabwe dollars—about five times the country's annual per capita income. 

This lottery, organized by the Zimbabwe Banking Corporation (Zimbank), was open to clients with significant account balances. The announcement left Master of Ceremonies Fallot Chawawa in disbelief, highlighting the depth of Mugabe's control and the corruption-infested extractive institutions of Zimbabwe.

Under Mugabe's regime, Zimbabwe's economy and public services deteriorated. By 2008, per capita income had halved since independence, and the country faced a catastrophic cholera outbreak. Unemployment soared to 94%, making Zimbabwe a vivid example of the consequences of extractive institutions.

This bleak scenario roots back to the colonial era, when Cecil Rhodes's British South Africa Company annexed rich farmlands and established a white-only apartheid state. Post-independence, Mugabe maintained these extractive institutions, benefitting his inner circle while suppressing opposition. 

Initially, the productive sectors of the economy, like agriculture, were left untouched. However, as Mugabe's popularity waned, he resorted to land expropriations and hyperinflation, further collapsing the economy.

The Movement for Democratic Change (MDC) emerged as a serious opposition, but elections remained plagued by violence and fraud. Mugabe's clampdown on white landowners and the subsequent economic collapse epitomized the destructive power of extractive institutions. By 2009, hyperinflation rendered the Zimbabwean dollar worthless, leading to the adoption of foreign currencies.

Zimbabwe's plight is not unique; it mirrors the fate of many nations with extractive institutions, where elites enrich themselves at the expense of societal progress. The institutional malaise, perpetuated by a legacy of colonial exploitation and corrupt governance, continues to impede economic growth and foster instability.

From Rhodes to Mugabe: The Destructive Power of Extractive Institutions in Zimbabwe

Global living standards differ vastly. Developed nations like the U.S. have superior access to healthcare, education, public services, and socio-economic opportunities than developing nations in sub-Saharan Africa, South Asia, and Central America. The gap between prosperous and impoverished nations is a recent phenomenon, for instance, Mexico was richer than the U.S. five centuries ago.

Inequality is not inevitable or predetermined by geography, culture, or ethnicity. Rather, it's rooted in the political and economic institutions of a nation. These institutions can be extractive, designed to concentrate power and wealth to a select few, or inclusive, distributing power and wealth more broadly to encourage innovation, economic activity, and prosperity.

Nations with inclusive economic and political institutions are more prosperous. Those with extractive institutions can experience growth, but it is often unsustainable due to the lack of innovation and political instability. Despite its potential for growth, extractive institutions often lead to a vicious cycle of poverty, while inclusive institutions create a virtuous cycle of prosperity.

Historical events, or 'critical junctures', can disrupt the balance of power and lead to institutional changes. However, these changes aren't always positive or enduring, and can depend on 'institutional drift', small changes that lead to divergence over time.

There are many examples of nations transitioning from extractive to inclusive institutions, like England in the 17th century, Japan during the Meiji Restoration, or Botswana post-independence. However, there are also examples of nations that have failed to make this transition, like Zimbabwe under Robert Mugabe.

The theory argues that foreign aid and policy interventions are unlikely to succeed in nations with extractive institutions, as they can be easily subverted or undermined by the power-holders. Instead, meaningful change requires a broad-based empowerment of society, which can be facilitated by a free and independent media. However, this process is slow and there are no easy solutions or quick fixes for building inclusive institutions.

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