Why is the average income of Canadian and Japanese residents so much higher than that of North Koreans or Ethiopians? Daron Acemoglu offers his answer in a recent commentary for Esquire magazine. He argues that differences in institutions, or rules, are the key driver behind global inequality.
Acemoglu asks readers to consider the two cities of Nogales on the Mexico-U.S. border. On the Arizona side, residents enjoy relatively high incomes, good infrastructure, and reliable public services.
“None of those things are a given across the border. There, the roads are bad, the infant-mortality rate high, electricity and phone service expensive and spotty.
The key difference is that those on the north side of the border enjoy law and order and dependable government services — they can go about their daily activities and jobs without fear for their life or safety or property rights. On the other side, the inhabitants have institutions that perpetuate crime, graft, and insecurity.”
Nogales, Sonora and Nogales, Arizona share similar cultures, geography, and climate. The lower income and quality of life on the Mexico side reflects the ineffective rules there. For Acemoglu, reversing the failure of institutions is the key to reducing global inequality.
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The soundness and transparency of government institutions that underpin the success of nations – as the recent example of Iraq and the historical litter of long drawn out experiments with democracy from Asia and Africa conveys – is itself not something that can be easily transplanted into polities and societies. In other words, even assuming that fixing institutions will help rid off poverty, how do we fix governments that can align the incentives?
Assembling the right mix of ingredients required to fix institutions is the biggest challenge – one that can rarely be overcome with quick-fixes like transplanting or grafting institutions. It often requires the measured march of history to evolve organically, a process that can at best be expedited.
see the full response here
http://gulzar05.blogspot.com/2009/11/incentives-matter-but-are-they-enough.html
— Gulzar · Nov 26, 06:06 AM · #
This reasoning is appealing. But institutionalists like Acemoglu, it seems to me, attempt to explain too much. The definition of ‘institutions’ tends to encompass everything – even schooling and health. The problem is that numerous variables vary by degree of development. Suppose, for example, that I believe that schooling is the key to development. Then, I might argue that income differences between Nogales, Arizona and Nogales, Mexico are due solely – or at least primarily – to differences in educational levels. We could test this hypothesis, by bringing the schooling of all residents of Nogales, Mexico, up to the levels of Nogales, Arizona. But such experiments are not feasible in the social sciences. We would like to explain one variable – per capita income – but we have a wealth of potential explanatory variables. In statistical terms, the model is ‘overdetermined’: there are more explanatory variables than there are unknowns, and the explanatory variables themselves are correlated. From: http://larrywillmore.net/blog/2009/12/01/institutions-and-economic-growth/
— Larry Willmore · Dec 2, 07:52 AM · #