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?

January 25, 2014

Australia Day, Sydney, 2004. (Credit: Phil Whitehouse - Wikimedia)

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.

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Takeaways

Australia should be wary of our own “Robber Barons” trying to take over not only resources, but also the media.

For nations to succeed, they need to defend and constantly improve their inclusive institutions.

The contrast between Australia and Argentina couldn’t be greater.

The Australian convict colony was very different from the slavery of the Americas and Africa.

How did Australia turn its historical “tyranny of distance” position into the “power of proximity”?