This year’s Nobel for economics has been awarded to three economists who have spent the last few decades explaining why some nations are rich and others are poor. Daron Acemoglu, James Robinson and Simon Johnson have co-written several books about the economics of democracy and the politics of economic success.
They’ve sometimes been criticised for overlooking important factors like geopolitics. But there’s another way of reading their books. Instead of seeking complete explanations, finely attuned to context, we can focus on five factors they underline. Alone, the five don’t address the entirety of complex national problems, although they do give us a good start.
Keep these factors in mind as we listen to the budget debates next week. They shine a spotlight on the big picture.
First, there is the global setting. Acemoglu has attracted attention by praising the Scandinavian model of social democracy but, simultaneously, dismissing US Senator Bernie Sanders who has declared that the US should be more like Denmark.
Acemoglu’s point: Denmark can only have the welfare system it does because the US does not. Denmark thrives because the US grows. If the US adopts a social democratic welfare system, its economy would grow less and, consequently, a smaller economy like Denmark’s would not be affluent enough to afford its system.
Acemoglu’s assessment has been challenged but the broader point remains. The regional and global context rules out some possibilities for Malta and permits others.
No one who says we should try to be like Singapore, for example, can be taken seriously. Singapore is on the rim of one of the fastest-growing economies in the world. Malta is on the rim, to its south, of some of the most dismal economies in the world. To its north, Italy has long been wrestling with slow growth. To its east, the world is in flames.
It’s been 20 years since a Maltese government (led by Lawrence Gonzi) developed an economic strategy, based on carving a niche in a global setting, and then fulfilled it. Since then, we’ve had an extension of that strategy’s shelf life, even though it’s fast expiring. Or else we’ve heard of new ventures, bombastically announced, which did not take off. Or else our governments have resorted to forms of economic development based on the ruthless exploitation of foreign workers and destruction of our natural environment and neighbourhoods.
Second, the reason why we have found it increasingly difficult to develop a workable strategic vision may not just be down to the mediocrity of our leaders. Acemoglu and Robinson, in Why Nations Fail, underline that developmental differences between countries (and, we could add, in the same country over time) are to be attributed to how their economies and politics work together.
Technological development and technocracy are not sustainable without stable politics- Ranier Fsadni
The worst thing you can have is an economy based on extraction. That is, the hoovering of resources by a few, an oligarchy, aiming at self-enrichment.
Oligarchies pay less thought to the long-term collective self-interest (since their wealth enables them to move elsewhere). They structure the economy to suit them. They prevent the creative renewal of economic sectors. They discourage inventiveness by shackling new entrants. They put the brakes on progress.
This, clearly, is the situation Malta is in – not least in relation to developers. It means little to declare that the government meets all developers, not some. Or that some curbs will be put in place. Or that the opposition condemns this or that project. All this will only tinker with the larger problem: the economy’s dependency on an industry that is increasingly thwarting more creative economic approaches.
Third, neither technological development (which politicians often favour) nor technocracy (which Maltese voters sometimes yearn for) are really possible without fixing the politics. Technological development and technocracy are not sustainable without stable politics.
Radical technological change is a social disruptor. Economic growth based on technological change leads to social upheavals that only a stable politics can address.
Technocracy is no substitute for politics at such a time. The major choices that need to be made are intrinsically political: protection for this group rather than that; tax cuts, investment and subsidies here, rather than there.
Fourth, how can we fix our politics? Our trio is clear-eyed. Everywhere, elites do not give up power easily. They only do so when an economic crisis threatens to lead to a political crisis that drains their power.
As Acemoglu and Robinson say in another book of theirs on the economic origins of dictatorship, democracy will only set roots when elites don’t have an incentive to overthrow it.
At first, they’ll try to fob the plebs with promises of reform. But if it’s clear that the voters distrust them, then real democratising reforms need to take place.
It turns out that democracy is good for the economy. It’s a restraint on the plundering that would otherwise take place.
Fifth, therefore, economies thrive when the power of government is balanced by the power of society. The relative strength of civil society is an important indicator of the long-term strategic prospects of an economy. Populations that allow their governments to exploit them and ignore the rule of law will not see their economy grow or change for the better.
The verdict by this year’s three Nobel prize winners is clear. The real test of a budget, for both government and opposition, is whether they can make credible commitments or if they seem trapped by their own self-interests.