Note- This article is a second part in the series of articles titled with ‘Nature v. Choice: What Determines the Past, Present and Future.’
Disclaimer- The II theory of development stands for Individual and Institutional theory of development. This refers to the choices and decisions that an individual and institution makes which contribute in the growth of that place and relative inequality with respect to the other places. It is not been proposed by anyone but is used solely for the purpose of this project.
According to the II theory, institutions—a collection of written and informal norms and systems for pressuring people to abide by these rules—play a crucial role in a nation’s ability to progress. Institutions are divided into two major categories by Acemoglu and Robinson: political and economic. The first governs how the country’s many authorities’ authority is divided and how these bodies are formed, while the second governs how people’ property is related to one another.
The economic institutions which are inclusive in nature safeguard the rights of large segments of society related to property and possession instead of catering to just the wealthy section of society. These institutions forbid the unjustifiable transfer of property, and let all people to engage in profitable economic activities. Workers are motivated to boost labor productivity in these institutions’ settings. According to the authors supporting II theory, the long-term viability of such economic institutions depends on inclusive political institutions that enable significant segments of society to engage in nation-building and reach judgments that are advantageous to the majority. These organizations serve as the cornerstone of all contemporary liberal democracies. Without these institutions, when a tiny segment of society seizes political power, it would eventually use that authority to seize economic power to attack the property rights of others, destroying inclusive economic institutions.
On the other side of the coin are the Economic Institutions which are extractive in nature, where large swaths of the population are left out of the distribution of money. They forbid everyone save the elite from taking advantage of economic interactions. Workers in such systems have little motivation to raise labor productivity since the elite will keep all or almost all of the extra money. Along with such economic institutions, there exist extractive political structures that prevent significant portions of the population from participating in national governance and accumulate the entire political power in the hands of a small group of people. This phenomenon is very common in the modern world where the military, the police, and the courts are used to maintain power
As per the II theory of development, the prevailing theories explaining the formation of wealth and poverty, such as those based on geography, environment, or any other factors is flawed.
How this theory applies on nations
Acemoglu and Robinson compare nation case studies to bolster their argument. They identify nations that share many of the characteristics in terms of geography, culture and norms but experience greater or worse levels of prosperity as a result of differing institutional and political decisions. Korea, which was fragmented into two parts in the tragic year of 1953, serves perhaps the starkest illustration. The economies of the two nations stands in contrast with each other with South Korea rising to become one of Asia’s richest nations while North Korea has remained among the continent’s poorest.
With the help of these instances the authors tried to show the role that institutions and individual plays in the development of a place and where they don’t work, the result is inequality with respect to places where they worked.
The II theory asserts that inclusion in political and economic institutions is the most important factor influencing economic development. In contrast to situations where a minority of population has vehement influence over the political institutions, institutions are said to be “inclusive” when many people have a voice in political decision-making. It contends that the rule of law is guaranteed by an effective democratic and pluralistic state and that inclusive institutions foster economic growth because they offer a framework for rewarding skills and innovative ideas.
Since in the situation where Extractive political institutions are in place, a minuscule group of people are in control of economic resources and therefore these institutions are resistant to change. The power that be in these institutions fears that in a situation of any change, there powers are going to be eroded. As a result, innovation and creativity are unable to bloom there.
Whereas, in Inclusive political institutions, the people are aware of their rights and the powers that be are aware of their duties and responsibilities towards the people. Since power is not accumulated in any small group of people, majority of decisions are taken for the welfare of the people. Because there is no fear of the state appropriating the labour of people, innovation and creativity thrive in these institutions which lead to rapid economic and overall development of a place.
Ultimately, the growth rate of Extractive Economic Institutions lags behind the growth rate of Inclusive Economic Institutions and therefore the consequent inequality.
This was the case of Europe in relation to the rest of the world. After the conquest of Normandy, the process of rule of law took its inception. Courts were established and after the prolonged jousting between Church, Feudal Lords and the Crown, the Magna Carta was established. It provided for the rights of the people, their lives and property. Slowly and gradually, these rights developed leading to establishment of institutions that were meant for the welfare of the majority section of society. This led to rapid trade and business and thereby expansion of economy. Innovation and Creativity were promoted which led to Industrial Revolution that benefitted not only the Britain but also the whole region of Western Europe.
This approach was missing in other parts of the World. Consider the case of India, where during the Medieval time, taxes on people were extracted at an exorbitant rate to meet the war needs.
This was continued during the colonial period as well where the rated of taxes was even more. During this whole period, innovation and creativity were undermined leading to a pauperized economy at the time of independence. The fact that Democratic institutions promote economic development is validated by the assertion that – from a fragile state, Indian economy has grown to become 5th largest economy in the World in just 75 years of independence.
How individual choices and democracy affect the economic progress
The institutions of political and economic power work in tandem with each other and therefore affects each other in numerous ways. The political institutions determine how the resources are going to be distributed in the society whereas the economic institutions determine how the political power is going to be allocated in the society. In this paradigm, the role of individual choices becomes very critical. People who demanded for better economic and living conditions were able to fulfill those when they were given pollical power to express their voice and demands. This led to establishment of more Inclusive Institutions that were ultimately called Democratic Institutions.
In continents where people did not revolt against these worsening conditions or their demands were subdued these institutions were not able to developed. As a result, these places were not able match the development pace of democratic institutions.
For instance, the monarch controlled political institutions during the democratization of Europe, notably in England before to the Glorious Revolution. Profits from expanding global commerce, however, gave commercially active nobility and a new, emerging merchant class de facto political authority in addition to the king. The interaction of the two political powers resulted in political institutions that increasingly favored the merchant class as well as economic institutions that promoted the interests of the merchant class because these nobles and the merchant class made significant contributions to the economic output as well as the monarch’s tax revenue. The merchant class gained power through this cycle throughout time, eventually becoming strong enough to overthrow the English monarchy and provide effective economic systems.
The authors supporting II theory demonstrate that various institutions lead to various rates of economic growth using a historical natural experiment. The article ‘The Colonial Origins of Comparative Development: An Empirical Investigation’– looks at institutional decisions made during the colonial era of various nations in connection to the current economic development of those same nations. It was shown that invaders tended to establish extractive regimes in nations where the disease environment made it difficult for them to live (high death rate), which led to today’s weak economic growth. However, colonists preferred to settle down and imitate the institutions from their home country when survival was easier (low death rates), as seen by the colonial successes of Australia and the United States. Thus, by setting institutions on vastly divergent trajectories, the death rate of colonial immigrants several hundred years ago dictated the economic prosperity of today’s post-colonial states.
After analyzing the both the approaches – the theory of Geographic determinism and the individual and institution developmental theory- that attempts to answer the question “what are the causes of inequality”, it can be concluded that for the positive progress of a place a panoply of factors are needed and if any of these factors are not there or if there but not working properly then the progress of that place is undermined in respect to places where they are working properly and consequently inequality gaps between the two places emerges.
The theory of geographic determinism elaborately explains the reasons for the causes of inequality from the perspective of geography and positive feedback loops but fails to undertake the role of individual and institutional in the development of a place into consideration.
The geographic factors of a place may provide it an early advantage with respect to the other places but if the society does not build upon those, then the progress is not sustainable.
With respect to the inequality that exists today between the parts of western Europe and rest of the world, which is also the subject area of this article, it can be said that early geographic advantages helped Europe in taking a lead in various spheres of progress but over the course of history the people of Europe and its institutions have made series of decisions that have enabled them to develop more than the other people and hence this gave rise to inequality.
Ultimately, for the policy makers perspective it is important to take into consideration both the geographic determinism theory and II theory of development while making decisions to counter inequality.