Why nations fail

Last week left us with no clear trends. Stocks slipped on Monday, but by the end of the week they seemed to have recovered their footing.

We spent the week in India.

“I wouldn’t invest a penny in India,” said our old friend, Jim Rogers. He may know something we don’t. Then again, we know so little that anyone could know more.

India was rich 500 years ago, with a GDP per capita among the highest in the world (according to estimates that are probably unreliable). Now it’s poor. Could it be rich again, or at least richer than it is now?

We don’t know. But we travelled to Mumbai via Zurich. A greater contrast would be hard to find. Zurich is spotless. Organised. Efficient and dependable. Mumbai is dirty. Disorganised. Chaotic, even. Zurich is one of the richest cities in the world. Mumbai is one of the poorest.

What accounts for the difference? Race? Culture? Climate? What follows is a discussion of the subject, with no real conclusion.

Many are the theories. Racism was popular before WWII. Before that, and after, climatism was a handy explanation. But neither can explain India’s poverty.

Look at Indians in America, Africa, or England. Out of their homeland, they are among the most successful of any racial group. In every line of work – art, engineering, business, academia – they are standouts. Even the CEO of Microsoft is from India.

As to climate, the theory changes with the times. When Egypt, Greece and Rome were the world’s leading powers, intellectuals presumed that cold weather was ill suited to civilisation. Then, when the locus of progress moved north, so did the theory. Today, the idea is common among people from cold climates: heat makes people lazy.

Heat may have influenced output in the days before the days of air conditioning. The US Congress used to take the entire summer off – in order to escape the heat of the Potomac.

But we grew up without air conditioning 40 miles from the Capitol building; we don’t recall it slowing us down too much. We worked through the hot summer months, doing hard heavy work in the tobacco fields.

And today, Miami and Singapore, both hot cities, flourish while Detroit goes bust and Vladivostok is wretched. Generally, Russia is a cold place. But it is hardly a rich place. By contrast, Australia is quite warm and relatively wealthy.

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One obvious cause of economic retardation is government. The more ambitious and aggressive it is, the more output will be depressed. The Chinese, immediately after WWII, were one of the world’s poorest people. You could have blamed it on their race or their culture. But it was neither.

Millions of these people fled to Hong Kong, which was little more than a barren rock, seeking the protection of the British government from Mao Zedong’s government. They brought their culture with them.

John Cowperthwaite was the British administrator assigned to watch over Hong Kong from 1961 to 1971. He made it a point not to interfere. He didn’t even allow the collection of statistics on unemployment or income. He didn’t want to provide the meddlers with any fodder for ‘improving’ things.

On the mainland, no sparrow could fall without being registered by the communist bureaucracy and there was a programme to solve every problem. There were ‘great leaps forward’, ‘cultural revolutions’ and ‘five-year plans’ aplenty.

The mainland Chinese became poorer and poorer, while the Chinese in Hong Kong got rich. By 1996, people in Hong Kong had a GDP per capita that was 137% of their British protectors.

A government reaches the point of declining marginal utility very quickly. A little – protecting property rights, enforcing contracts, and keeping people safe from violence – seems to pay off well. A lot is usually disastrous.

Indians have a lot of government – a relic of the Stalinisation of the country under Indira Ghandi. After WWII, Indians sent their elite youth – including Mrs Ghandi – to study in England. There, they learned the ideas and policies that retarded UK growth for almost a whole generation. Returning to India, they carried Keynes and Marx in their luggage.

Mrs Ghandi took over the top job from her father, Jawaharlal Nehru. She then came up with six sequential five-year plans. One five-year plan is usually enough to kill an economy. The Indian economy took all six treatments and somehow survived.

Traces of the quack medicine remain today. You will experience a bit of it even before you get to India. You must apply for a visa. Doing so requires paperwork. Paperwork takes time. And Indian bureaucrats are very serious about their paperwork. Our application for a visa was rejected when our signature strayed out of the box. We had to reapply!

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  • Richard Thompson

    “Our application for a visa was rejected when our signature strayed out of the box. We had to reapply!” – so just like the USA then!

  • R M Dunigan

    Your thoughts for the day never fail to give me something to ‘mull over’ and usually give me a good laugh. Just like today — you’re so good with words.

    Keep it up!


  • A Lever

    Like most other travellers to India, you seem confused. A tip, don’t judge, enjoy the assault on your senses, try and understand the differences with home and learn about yourself. Some insights I found useful are;
    -Its 1.2bn people are the same as everyone else, they look to survive and then make a better life for their kids.
    -After centuries of colonisation enriching Mughals and Brits, they chose Democracy. The pols need the common man’s vote who is poor, rural and hungry.
    -The economy, managed by a British type colonial bureaucracy, has been liberalising for a couple of decades after four of Fabian Socialism . Not long.
    -Compared to the US there are 4x the people in 1/3 of the land generating 1/4 of GDP at PPP. 4% of GDP goes on Health vs 18%, 3.2% on Education vs 5.3%. 2% are obese, 33% back home.
    -The US has 160 times more debt per capita. India has a competent Central Bank.
    I now understand your headline. By the way, they got rid of the Maharajahs’ Privy Purse in 1971 so be careful about your use of the Royal ‘we’.

    • sodit

      The British style colonial bureaucracy was small… had to be if the Brits where to profit, bureaucracy costs money. The modern bureaucracy is an Indian creation.

      Britain only ever ruled about half of India, the rest comprised independent states which had treaties with the UK.

      Britian’s big gift to India was low interest rates. They fell from about 50% pa under the Moghuls (which still didn’t free up capital for borrowing because no one expected to get their money back) to an average of 4%. This allowed the Indian economy to grow endogenously.

  • http://arpanaservices.org Mark Henderson

    Bill, you are so so right about India! I have lived there for 35 years, and I know what an amazingly resourceful people the Indians are. They are unfortunately saddled with a government and bureaucracy which make Kafka’s nightmares like a Sunday outing! I was working for a large charitable organisation, and I have experienced the corruption, the exploitation of the ‘common man’, God bless him, at every level. There are so many government schemes for the poor, and so many officials/crooks creaming off the proceeds, there is just nothing left for the so called beneficiaries, people who have no influence and no voice, in the villages and city slums of India. We were working for empowerment of women, and women are the driving force for change in India today.

  • klarrls

    what for BS russia is not poor you idiot its one of the richest countries in the world look whos richer than russia and look whose poorer than russia. its almost the entire world


  • Narendra Patel

    Indian people are hard working that,s why the ahead,they all are working 10/12 houses a day. Now a days econome is more good than any other country.you can not under stand India if stay 6/7 day. If u invest your money or fix deposit in the bank you get more money.finally it,s democrec country.but your article is good.

  • sodit

    Social culture determines prosperity.

    The UK became prosperous after Mrs. Thatcher deliberately started minimising the role of government… only for it to stagnate when her successors started to reassert themselves.

    Interestingly, social mobility improved when she stopped regulating, and declined when it was restarted.

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