This is much the East can learn from the West on economics
AUGUST is the holiday month – the time when we pause to take stock of a hectic first half year, and wonder what lies ahead.
Nestled in the hills of northern Laos, the ancient city of Luang
Prabang sits around a bend in the river Mekong, isolated for centuries
and renowned today as a city of 15th century Buddhist temples, protected
as a Unesco Heritage site. It is a good place to catch up on one’s
history to try to comprehend the uncertain future.
The recent best-seller by Massachusetts Institute of Technology economics Prof
Daron Acemoglu and Harvard political scientist James Robinson,
Why Nations Fail: The Origins of Power, Prosperity and Poverty
(Penguin 2012), argued that national failure were all due to man-made
factors, more specifically, how political institutions became
extractive, rather than inclusive.
Acemoglu and Robinson is provocative because they stir up the debate on why Latin American
economies never quite made it, even though they are resource rich. They
did not succeed despite huge wealth because their political institutions
remained extractive, meaning a few hundred families or elite
essentially controlled the key resources of the continent for their own
benefit.
Another obvious example is the difference between North Korea, one of the poorest countries around, and South Korea, an
innovative and dynamic economy capable of challenging the best of the
West, by learning from the West.
The Acemoglu and Robinson book touches on a raw nerve because many in the West are unsure whether
they will continue to be dominant in the years to come. They argue that
China will sooner or later stop growing because the institutions there
are becoming extractive. But as one review argued, it cannot be ruled
out that Chinese institutions would evolve into inclusive systems. After
all, China could not have succeeded without being inclusive – taking
more than half a billion out of poverty
In the same genre, Stanford Professor of Classics and History, Ian Morris’ 2011 book,
Why the West Rules – For Now: The Patterns of History and What They reveal about the Future, takes also the grand sweep, arguing not only about the factors of biology and sociology, but also about geography.
So instead of Acemoglu and Robinson’s dictum, “institutions,
institutions and institutions”, Morris considers that it is more about
“location, location, location.” He argues that biology and sociology
explain the similaries in development between the East and West, but “it
is geography that explains why the West rules.”
This view
concurs with Asian historian Wang Gung-wu’s perceptive insight that the
West developed maritime and today air and cyberspace technology and
power, whereas China remains essentially a continental or land-based
power. Geography does shape behaviour and perception.
Personally, I am less persuaded by what caused nations to fail than what
caused them to succeed, and not just succeed for a few decades, but
remain relevant for centuries.
Most people forget that the
first modern economy in the world was not Portugal or Spain, or England,
but Holland. Even though the Portuguese and Spaniards opened up the
maritime routes to America and the Spice Islands, they remained feudal
powers that never evolved the institutions to manage their colonies
efficiently and professionally.
Last month in Amsterdam, I was given a copy of Marius van Nieuwkerk’s history of
Dutch Golden Glory: The Financial Power of the Netherlands through the Ages (2006).
This wonderful gem of a book, beautifully illustrated, attributed the
rise of Holland as a conquest of man over water. As we all know, Holland
has only a population of 16.6 million, in an area 20% larger than the
island of Taiwan, ranked 17th in the world in terms of GDP, and 14th in
terms of GDP per capita, at US$46,100 just behind the United States
(US$50,000) and Japan (US$46,700), but ahead of old rivals, UK
(US$38,600).
Historically, because of constant flooding in its
low-lying land, the Dutch learnt to work cooperatively to build dykes,
through “poldering” – constant irrigation, drainage and pumping of
water. Thus, in their constant struggle against flooding and weather
risks, the Dutch developed their infrastructure cooperatively, learning
how to manage risks through precaution (high savings), consultation
(constant feedback) and inspection (maintenance of strict standards). To
do so, they built highly inclusive, flexible and innovative
institutions that opened up to global trade.
Their constant struggle against water meant that the Dutch had superior shipbuilding
technology, drawing on timber from the Baltic areas and arbitraging the
trade with northern Europe. By 1598, the Dutch had established the first
Insurance Chamber, the largest trading company by 1602 (VOC), and
forerunner of the first central bank, the Amsterdam Exchange Bank in
1609, Merchants Exchange 1611, and Grain Exchange in 1616.
VOC, which had trading monopoly for the East Indies in the spice trade,
was so profitable that between 1602 and 1796, the average dividend was
18.5% annually! Indeed, the Dutch were successful because they were not
only good traders, but also insurers and bankers to the rest of Europe.
One tends to forget that as late as 1750, 30% of the share capital of
the Bank of England was owned by the Dutch.
What is remarkable about the Dutch model is not that it has not been taken over by other
larger powers, but its sustainability and durability. The Dutch runs one
of the largest pension funds in the world, and a recent study has shown
that there are over 400 Dutch companies with over a century of history,
including one that survived from1530. It goes to show that a country
may be small, but through thrift, hard-work, openness, and good
governance, the country could succeed despite the odds.
There is much that the East has still to learn from the West. No history is a
straight line, and there is nothing inevitable about success or failure.
Whether it is Abenomics or Likenomics, the key to sustainable and
inclusive growth is about strong social institutions with the right
checks and balances.
Think Asian by Tan Sri Andrew Sheng
TAN SRI ANDREW SHENG is president of the Fung Global Institute.
