Sunday, March 25, 2012

Limits To Government, Strong Property Rights, Competitive Markets And Incentives To Invest Foster Economic Growth

From The Wall Street Journal, "The Roots of Hardship: Despite massive amounts of aid, poor countries tend to stay poor. Maybe their institutions are the problem." by William Easterly:
For Messrs. [Daron] Acemoglu and [James A] Robinson, it is institutions that determine the fate of nations. Success comes, the authors say, when political and economic institutions are "inclusive" and pluralistic, creating incentives for everyone to invest in the future. Nations fail when institutions are "extractive," protecting the political and economic power of only a small elite that takes income from everyone else.
Inclusive political institutions mean both a broad distribution of political power and limits to that power, such as democratic elections and written constitutions. Inclusive economic institutions encompass property rights, contract enforcement, ease of starting new companies, competitive markets, and freedom for citizens to enter the occupation and the industry of their choice. The billionaire telecommunications mogul Carlos Slim, we're told, does not fall into this category. He is extractive, "a master at obtaining exclusive contracts," winning economic monopolies through political connections, but he enriches primarily himself, not Mexico. Bill Gates, by contrast, enriches both himself and the U.S. because he can make money only by creating products that are better or more popular than those produced by rivals.
MIT Professor Daron Acemoglu and Harvard Professor James A Robinson are the academic heavyweights in the field of why countries grow or fail.

In their framework of inclusive versus extractive, I think the general public understands intuitively, without exactly knowing why, and shows through their low approval rating of Obama and his programs, such as the health care law and the GM bailout, that the president's programs are extractive and impediments to the future economic growth of the US.

Inclusiveness to Acemoglu and Robinson is about the freedom to enter new businesses in a competitive, property rights protected marketplace. Inclusiveness is not about class warfare, government programs or income redistribution as Obama claims in his rhetoric and proposed laws. The US will not succeed if it repeatedly favors Unions over GM bondholders; Solyndra and other green technologies over competitive energy markets: Income redistribution over investment incentives. As Acemoglu and Robinson show, some long term government actions can have dire consequences for a nation's future economic growth and continued existence.

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