Why Nations Fail.

 -> Revolt in Egypt in 2011 was because people wanted a political change: an end to dictatorship of Hosni Mubarak.

--> Different laws for every person was the reason behind the bad conditions of Mexico. 

Besides this, colonial rule of different empires on Mexico and US is another reason for lack of democracy in Mexico. 

Mexico and other latin American countries were ruled by Spain which was exploiting and taking out their resources. In contrast to Spain, US was ruled by Britain which inculcated a sense of Democracy in the minds of people.

Q: Why some countries are rich while the other are poor? 

Ans:

1: Geography Hypothesis:

This view of geography holds that dieases like Malaria and low agricultural production owing to torrential rains which lessen the nutrients in the soil are responsible for poor or high growth in the tropical region.

Geography plays a vital role in keeping the poor where they are. For example, Montesque said that tropical regions and their peoples will not be rich. But this isn't the case. India, China, Indus Valley of Mohen jo Daro and Harappa are cases in point. Bad conditions of the countries was because of different colonial ruler.

2: Culture Hypothesis:

According to this view, religion, values, norms are responsible for poverty or richness. Max Weber, German Socialigist, suggested that Protestant reformation gave birth to industrial society in Europe. Besides religion, "national culture" can also cause or stop poverty. Perhaps it was the English culture which explains why US and Canada are prosperous. But what about Sierra Leone and Nigeria? These were also ruled by Britain. And they are poor. If national culture is the main thing, then why China was poor but now rich. It means policies not culture is responsible for growth.

3. The ignorance Hypothesis: It says that our ruler don't know how to make poor countries rich. This idea is held by many economists. Poor countries are poor because they have a lot of market failures and because economists and policymakers don't know how to get rid of them and have heeded wrong advice in the past. Rich nations are rich because they have figured out better policies and have successfully eliminated these failures. This isn't be the case either. 

Q: Inclusive and extractive economic and political institutions. 

Inclusive economic institutions (IEI) are essential for economic growth. Because it creates inclusive markets which encourage people to do what they want to do.

IEI also pave the way for two other engines of prosperity: Education and Technology. Because without technological improvements no sustained economic growth can be seen. And without education knowing or inventing new technologies is just a dream. 

Inclusive Economic Institutions are those that allow and encourage participation by the great mass of people in economic activities in their desired profession.

Political and economic institutions, highly dependent on each other, that are sufficiently centralized and pluralistic are "inclusive". Centralization is essential for the growth otherwise there will be choas like somalia. On the other hand there are "extractive" political and economic institutions. They are bad because in it political power remains in the hands of a few who creates economic policies for their own betterment. For example, in North Korea economic system is made to benefit the narrow elites. 

Q: why not always choose prosperity? 

Ans: Kings try to rich themselves and not people because of the concept given by Joseph Schumpeter called "Creative Destruction". In it he said that if economic growth increases, distribution of power in the society decrease which is harmful for the king and elites. For example, industrial revolution changed the pattern of society altogether. Aristocrates lost the political power they had because people now shunned their lands and went to industries for work. Besides, new businessmen and Merchants took their place and became "new aristocrats".

In addition to aristocrats, artisans whose manual skills were being replaced by mechanization also detested Industrial revolution. These artisans were called LUDDITES (hater of technological change).They arsoned the houses of many inventors but to no avail. 

In Austria-Hungary and Russia Industrial revolution came very late because aristocrats there didn't want their powers to be taken.

Q: Growth under Extractive Political institutions.

Ans: There are two ways to achieve growth under Extractive Political institutions.

1. First, even if economic institutions are extractive, growth is possible when elite can directly allocate resources to high-productivity activities that they themselves control. 

Example: Economic growth and industrialisation of the Soviet Union from 1928 to 1970. Political and economic institutions were highly extractive but USSR achieved growth because it moved it resources from agriculture to industry. 

2. Second, growth under extractive political institutions is possible when the institutions permit the development of somewhat inclusive economic institutions. They do so because they are not threatened by "creative destruction" theory.

Example: South Korean General Park grabbed power in 1961 through military coup. Despite extractive political institution, it led to growth. Because South korea was moving to inclusive political institution:democracy.

            The World The Plague Created:

The Bubonic plague, the Black Death, changed the European society socially, economically, and politically. It killed feudalism in the Western Europe. 

At the turn of 14th century, Europe had a feudal order. It was based on hierarchical relationship between the king and the lords beneath him, with peasants at the bottom. King gave lands to these lords in exchange for military services. The lords then allocated these lands to peasants. The latter had to perform extensive unpaid labour in return and were subject to many fines and taxes. These peasants were called serfs.

                         The plague shook the foundations of feudal order. Half of population died owing to plague. The remaining peasants, which were less in number, demanded an end to fines, taxes and unpaid labour. They got what they wanted. But this didn't happen overnight. Many states including England tried to curb this through force. But the Peasant revolt of 1381 made this happen.

                           The situation in eastern Europe was totally different. After the plague, Eastern landlords started to take over large tracts of land and expand their holdings. The situation in the West created incentive for the East to exploit their labour in order to meet the demand of wheat, rye, and livestock of West. This is called "Second Serfdom". Countries of the East used force to boost their trade with the West. Peasants did nothing, unlike West where Peasants revolted.

It was a market economy, but not an inclusive one.

         On the whole, the plague was beneficial for the West (England) because it created inclusive institutions. But it was dangerous for the East because it led to the emergence of extractive institutions.

And this show why some countries are poor while other are prosperous.

        The Making of Inclusive Institutions:

The "Glorious Revolution" (1688) in England limited the power of King and the Executive, and relocated to the Parliament to determine economic institutions. The latter, as a result, started becoming more inclusive. But before it, lands were caught in archaic form of property rights that made it impossible to sell and risky to invest in. The Revolution changed it altogether. It did this: Arbitrary taxation ceased, property rights enforced, law and order for everyone. Besides, it facilitated the construction of roads, canals, and railways to boost industrial growth.

After this revolution, Industrial revolution occurred. It happened because of inclusive economic institutions: every talent had a place. Before Glorious Revolution, independent traders and Merchants were unhappy about the monopolies created by the Queen. Therefore, they demanded a political change which resulted in the Glorious Revolution. 

            The technological advances, the drive of businesses to expand and invest, and the efficient use of skills and talent were made all possible by the inclusive economic institutions that England developed. These in turn were founded owing to inclusive political institutions. The latter was made possible because of Glorious Revolution.

The Soviet Union was able to generate rapid Growth even under extractive institutions because the bolsheviks built a powerful centralized state and used it to allocate resources towards industry. But it was short-lived because it didn't adopted new technologies.

Q: The Venice becomes Museum

Ans: Historically, after Venice independence, it became a prosper state by introducing "commenda" : It was a contract between old rich people, who cannot travel, and young poor people who can travel and face the danger of trading. These young people shared the profit with the 'old'. And it led to upward social mobility.

            This Commenda bring about inclusive economic institutions thereby escalating growth and properity. The uplift caused by the latter brought about political change giving power to common people. And it was the beginning of inclusive political institutions. But because of resistance by the elites and coup this inclusive political institutions was gone and with it growth and prosperity. And the palace and many other things became the part of museum in Italy.

Q: Trouble with Stocking.

Ans: Queen Elizabeth had issued a ruling that her people should always wear a knitted cap. William lee, a student of Cambridge University, after seeing people working manually, invented "stocking frame knitting machine" in 1589. He showed it to the Queen but the latter rejected it. Because she thought it would create unemployment and political instability among the manually working people which is harmful for her crown. Same thing happened with James I, the successor of Queen Elizabeth. Lee also went to France but to no avail.

                    Besides a threat to Crown, the machine would give birth to Creative destruction. Technological innovation makes human societies prosper, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people. For sustained economic growth we need new technologies and mostly latter comes from the newcomers likely lee. New technologies make societies prosper but the process of creative destruction that it initates threatens the livelihood of those who work with old technology, such as hand-knitters who would have found themselves unemployed by Lee's technology. Elites becomes barriers to innovation because they have much to lose from creative destruction.

Q: Austro-Hungary and Russia and China. 

Both countries were against industrialization which was at its peak in England. Both countries thought that by establishing factories many poor workers will come to cities and may work against the monarchy. That's why they restricted their countries to agriculture. Same thing happened with China. 

The latter banned merchants from trading internationally. Then the state stopped itself from international trade altogether. This was done because of fear of creative destruction. Russia and Austria-Hungary didn't bulit railway because they thought it will give people an unwanted mobility which may be harmful for the political systems. But after Crimean war Russia knew that it had made a mistake by not establishing railways.

In addition to this, their economy was stagnant whereas countries adopting industrialization were booming.

Q: Dual Economy Paradigm.

Ans: It was proposed by Sir Arthur Lewis in 1955. 

According to Lewis, many underdeveloped economies have a dual structure and are divided into a modern sector and a traditional sector. The modern sector, which correspond to the more developed part of the economy, is associated with urban life, modern industry, and the use of advanced technologies. The traditional sector is associated with rural life, agriculture, and backward institutions and technologies. Backwards agricultural institutions include the communal ownership of the land, which implies the absence of private property rights of land.

                          For generations of development economists building on Lewis's insight, the problem of development has come to mean moving people and resources out of the traditional sector, agriculture, and the countryside, and into modern sector, industry and cities. In 1979 Lewis received the noble prize for his work on economic development.

            

Example of dual economy Paradigm: South Africa was split into traditional sector that was backward and poor and a modern one that was vibrant and prosperous. But how this happened? Why countries are divided into traditional and modern sectors? In the case of South Africa, Europeans did this to enslave local people. Formerly, the Whites dominanted every thing. They promulgated the Native Land Act of 1913. This act, anticipating Lewis's notion of dual economy, divided South Africa into two parts: modern and traditional. This act gave 87% of the land to European who represented about 20% of the population, while remaining 13% was given to the indigenous people.

           In a nutshell, dual economy was not natural or inevitable. It had been created by European colonialism. Yes, the locals were poor and technologically backward, and the European were the opposite. But this all was an outcome of government policy.

Chartist movement: It was a campaign for universal suffrage after 1838. William Lovet was its founder. This movement was the best way to ensure a coat, a hat, a roof, and a good dinner for the working man.

First, second and third reforms Act of 1832, 1867 and 1884 respectively: These acts gave more people the right to vote. With each act the numbers of people were increased. Ultimately, the Representation of the People Act of 1918 gave the vote to all adult males over the age of 21, and to women over the age of thirty who were taxpayers or married to taxpayers.

Modernisation theory by Seymour Martin Lipset:

           It maintains that all societies, as they grow, are headed towards a more modern, developed and civilised existence, and in particular towards democracy. Many followers of this theory also claim that, like democracy, inclusive institutions will emerge as a by-product of the growth process. Moreover, even though democracy is not the same as inclusive political institutions, regular elections and relatively unencumbered political competition are likely to bring forth the development of inclusive political institutions.

                        Different versions of modernisation theory also claim that an educated workforce will naturally lead to democracy and better institutions.

                  In somewhat postmodern version of modernisation theory, New York Times columnist Thomas Friedman went so far as to suggest that once a country got enough McDonald's restaurants, democracy and institutions were bound to follow.

USA and China and failures of Modernisation theory:

               George H.W Bush summarized US policy towards Chinese democracy as "Trade freely with China and time is on our side." The idea was that as China traded freely with the West, it would grow, and the growth would bring democracy and better institutions in China, as modernisation theory predicted. But this is not the case.

                     Same thing happened in Iraq. USA thought that its regime change policy will bring about democracy because Iraqi population was educated and was not as poor as other sub-saharan African nations. These things was done according to the modernisation theory. But this didn't happen. On the contrary, Iraq descended into civil war and anarchy.

            Historically, Japan and Germany were industrialised and rich nations and had comparatively well-educated citizens. But this didn't prevent the rise of NAZI party in Germany and Military dictatorship in Japan. This gave birth to extractive institutions.