In Malawi, when local newspapers referred to the president as “the big kahuna,” his office threatened a jail sentence if they did not stop. This threat and subsequent events take us straight to Why Nations Fail.
Malawi is a small sliver shaped African nation. Landlocked, it is sort of tucked into Mozambique, south of Tanzania and east of Zambia. Until recently, with tobacco and tea its major exports, and foreign aid that included Madonna’s $15 million school building project, economic growth touched 7%.
Now though, as its economic woes increase, Malawi remains among the poorest nations in the world. The value of their currency, the kwacha, went down when the world price of tobacco dipped and foreign aid declined. The crisis worsened when the UK froze foreign aid after the British ambassador was kicked out for saying the government was becoming increasingly authoritarian. In addition, Madonna scaled down her school building project to a $300,000 donation to a local NGO. And finally, perhaps creating a succession battle, the 78 year old Malawian president had a fatal heart attack last week.
And that returns us to Why Nations Fail. While there is much more of a Malawian story to be told, even these disparate facts point to basic reasons that certain nations are poor. In Why Nations Fail, economists Daron Acemoglu and James Robinson tell us that economic success does not depend on geography or natural resources, cultural traits or wise economic advice. Instead it is political institutions. “As political institutions influence behavior and incentives in real life, they forge the success or failure of nations.”
Our bottom line: Whether considering foreign aid or our own economy, we might more consistently assess how political institutions are shaping behavior. Or, as Dr. Acemoglu said in an econtalk podcast, “…prosperity is created by incentives, and incentives are created by institutions.”
My Sources: These WSJ articles here and here. Why Nations Fail by Daron Acemoglu and James A. Robinson. You might also enjoy this Thomas Friedman, NY Times Op-Ed on the book and also this econtalk podcast.
Selling for 7,000 tugriks, the Mongolian edition of Cosmopolitan has arrived in Ulan Bator. Stephen Colbert tells us that, “With their Cosmopolitan subscriptions, Mongolian women get half off the newsstand price, plus a free goat bladder phone.” (You can watch the entire clip here.)
Although per capita income is close to $2,000 and the ratio of livestock to people is 16 to 1, Mongolian women can shop at Louis Vuitton, Hugo Boss, Burberry and Emporio Armani at their new Ulan Bator luxury mall.
It is all about copper, gold, coal and uranium. Home of massive mineral deposits, Mongolian wealth has begun to soar. With foreign investment from the Australian-British corporation, Rio Tinto and Canadian based, Ivanhoe Mines, the Mongolian government has received $1/2 billion in taxes and fees.
Other Mongolian facts: GE has begin selling MRI equipment to Mongolian hospitals. Education? 98% literacy rate. Ease of doing business? The World Bank gives it #73 out of 183 countries. A stock market? The London Stock Exchange is managing the Mongolian Stock Exchange.
The Economic Lesson
Previously known for its nomads and high quality cashmere, now, the Mongolian economy is changing. The world wants Mongolia’s resources. In response, how will the Mongolian economy evolve?
U.S. economic development unfolded during 2 centuries.
It was fueled by:
- agriculture (early 19th century),
- capital formation (later 19th century),
- consumer goods 1st half 20th century)
- services (contemporary)
An Economic Question: As a Mongolian political leader, how would you manage the emergence of Mongolia’s economy?
What if you made a huge amount of money available for projects in Northern Africa and the Middle East? Let’s say you successfully expanded airport capacity in Cairo or raised incomes in rural Tunisian communities? The World Bank can claim these successes.
And yet, they are saying that their development mission has to involve more. In an NPR/Marketplace interview, World Bank president Robert Zoellick said the World Bank’s challenge was to “connect citizen involvement with the development challenge.”
Adding specifics during this past weekend’s World Bank spring meetings, Mr. Zoellick named soaring food prices and joblessness in Northern Africa and the Middle East as primary concerns. Also, citing the “youth bulge,” that would require 40 million new jobs during the next 10 years, he expressed support for short-term job creation.
The Economic Lesson
Not really a bank, the World Bank is still a financial intermediary. Borrowing in world financial markets, it raises money. Then, it loans its funds to developing nations. Technically called the International Bank for Reconstruction and Development (IBRD), it was created in 1944.
You might want to look here to see a fascinating graph of the different national currencies that fund their projects.