Jared Diamond | The Role of Good Institutions: Why the State Is Rich or Poor?
Author | Jared Diamond
One of the core issues of economics relates to the wealth and poverty of the country. Some countries are much richer than others. For example, Italy and the United States are much richer than Ethiopia and Mexico. Why is there a difference between rich and poor countries? I discussed the role of geography in the difference between rich and poor between countries and gave some answers to this question. Here, I will discuss another part of the answer. This part will receive more attention from economists than the previous content about geographical role.
The conventional answers provided by economists relate to the human system. There is no doubt that some human systems have been effective in stimulating citizens to participate in production and thus promoting the growth of national wealth. Other systems have played an important role in dispelling people's enthusiasm for production. As a result, it has largely led to the country's poverty. Economists have cited many very convincing examples to illustrate the importance of the system. One of them is to compare two comparable countries. Usually, the matching countries are adjacent to each other and have a very similar environment. They used to be a country; however, they now become independent countries and have different social systems, and the result is that the amount of wealth between the two countries is also very different. These cases show that the institutional role has an impact on wealth, which is still true even when there are little or little geographical differences between countries. Three groups of such examples are often cited: the difference between the wealth of South Korea, which has leapt to the first world standard of living, and the extremely backward North Korea; the difference between the wealth of former West Germany and the low economy of the former East Germany. Even many years after the fall of the Berlin Wall in Germany, the relatively low economic level of the former East Germany is still Not completely eliminated; the third group is Haiti and the Dominican Republic, which are also located on Hispaniola Island in the Caribbean Sea:
Haiti in the west is the poorest country in the Western Hemisphere, and the Dominican Republic in the east, although definitely not a rich country, but a developing country, is six times richer than Haiti.
There is no doubt that the study of these cases gives convincing evidence that differences in systems can lead to huge differences in national wealth, which still exist even among countries with no geographical differences in terms of environment.
Economists summarized this finding and then concluded that the system is the most critical factor in the gap between rich and poor countries. This conclusion provides us with strong evidence of why some countries are rich and others are poor - in chapter one, I give a well-founded explanation of why geographical factors are also important for the differences between rich and poor countries. Economists also give precise definitions and specific discussions on what they call the concept of "good system". The term means: economic, social and political systems that can inspire people to actively engage in production as individuals in order to accumulate national wealth.
Economists have done a full study of what constitutes a good system, and on this basis, they have selected at least a dozen typical good systems. Now, I'm going to talk about these dozens of good
systems. One thing I want to make clear is that I don't intend to rank them according to the importance. That is to say, the good system I talked about first is not more important than what I later said.
First, a clear example of a good system is the absence of corruption, especially the absence of government. If a person is clearly convinced that he or she can have the results of his or her hard work, he or she is more likely to be motivated to work actively. However, if the results of these hard work are most likely to be reduced or misappropriated by corruption by government officials or corporate corruption, the opposite is true.
Second, good systems protect private property rights and prevent government confiscation or private theft, which is also closely related to the absence of corruption. Moreover, if the law enacted by the government allows the confiscation of your labor results, or if others can steal your labor results, why do you work hard?
Third, the rule of law is more common and related to the two good systems mentioned above. If the law clearly stipulates what should happen, and if these legal provisions can indeed be enforced, then you will know what you will do and will not do to accumulate your private wealth.
IV. The most specific example of the rule of law is the execution of contracts, whether public or private. If you have signed a contract with the government or another private or private group, and if you are sure that even if the other party wants to tear up the contract, the government policy will allow you to execute the contract, then you will continue to work, because you are sure that you will have the opportunity to benefit from the payment.
V. We have talked about four aspects of good institutions, and another aspect is related to the above four aspects to some extent, that is, to inspire citizens to invest in financial capital and provide opportunities. Your capital will not be confiscated, will not be swallowed up by corruption, and will be protected by laws and contracts. It is not enough to know. If your capital can only be hidden under the bed and there is no opportunity to use it to invest, for you, your capital is of no use except for purchasing. However, if you can invest in capital, then capital will grow and generate more capital. In this way, you will be encouraged to work more actively. Therefore, countries with stock markets, venture capital markets and real estate markets provide opportunities for capital growth and incentives for citizens to work.
VI. So far, we have given five examples of good systems, which are interrelated. Another example of good institutions can be seen as part of the rule of law - the probability of being killed is low. In a country, when a person always feels that his body is in danger of being hurt and may be killed, he has to spend energy to ensure that he can live. It has become an urgent task to find a way to survive. If a person can't even ensure that he is alive, hard work and capital investment have to be secondary. For example, in Norway, the probability of being killed is low, which, together with other reasons, makes Norway the richest country in the world. However, in Honduras, the risk of killing is high, which, together with other reasons, makes Honduras a poor country.
VII. Another example of a good system, expressed in terminology, is "effectiveness of government". It is not enough for a country's government to have practical and written laws. The government must effectively implement these legal provisions to formulate policies that can promote the development of the country and train and select high-quality government officials.
VIII. In my subsequent four examples of good systems, I will turn to the financial system. Economists like to emphasize the importance of controlling inflation. Today, if your currency can be expected to have almost the same value in the next few years, it makes sense for you to adopt a long-term financial plan. But if your country is in an uncontrollable state of inflation, like inflation in Germany in 1923 and in Argentina in recent years, why do you have to work hard to make money? The money you earn will depreciate in a few weeks or even hours.
VIIII. Economists also emphasize the flow of capital within and between countries. In the short term, restricting capital flows may be necessary to protect economic growth in the early stages; but in the long run, restricting capital flows is disadvantageous, because it prevents an economy from competing with other efficient economies, which is inevitable and necessary.
X. Similarly, economists also emphasize the importance of breaking down trade barriers. In the long run, trade barriers retain inefficient industries, so that inefficient industries are not exposed to the competitive environment of other countries' efficient industries, which will eventually cause damage to their own economies.
XI. Related to the two factors of capital circulation and commodity circulation, economists emphasize the openness of currency exchange. If citizens and industries can convert their own currencies into the currencies of other countries, so that they can buy overseas goods, instead of having difficulties in converting currencies, they will be more active in producing products. For example, why do the people of this country volunteer to work hard when they can only buy a small variety of goods produced by their own countries and not from a wide variety of goods?
XII. Finally, one remaining example of good institutions is that economists emphasize investment in education in human capital. If a country has a good education system, the majority of citizens can receive education and find suitable jobs. Conversely, the government has thus developed the economic potential of all citizens, not just the minority citizens who have access to education.
