The narrow corridor of success

30 Jan 2020

Professor Brian Kantor

Investec Wealth & Investment

A new book by Harvard economists Daron Acemoglu and James A Robinson sheds light on what success looks like for nations. An empowered and critical civil society is crucial.

The achievements of a few highly successful economies are admirable and conspicuous. Consistent growth in incomes and output over many decades has eliminated poverty. The growth has been accompanied by rising tax revenues that are easily collected, without much disturbing the engines of growth.
Growth provides the means to fight crime, protect borders, provide roads, sewers and vaccinations, of equal value to all.
These are then redistributed in cash and kind to provide a measure of security for all its citizens against the accidents to which individuals and their families are always vulnerable.  Growth provides the means to fight crime, protect borders, provide roads, sewers and vaccinations, of equal value to all.  The caveat is that this historically unprecedented abundance is not as appreciated or as popular as it should be. Continued success can never be taken for granted.
 
Open access to markets for all goods and services and for the resources – labour, capital and natural resources – with which to compete for custom, is a critical ingredient for success. Innovation threatens established interests and must be recognised as a force for good. Rights that protect wealth and persons against fraud, theft or violent assault, supported by predictable laws and transparent regulations, are essential for success.
 
Competent and responsive government agencies are essential. A society that is critical of government action, aware and unafraid of what a powerful government might arbitrarily do to them, makes for good government.
 
Harvard economists Daron Acemoglu and James A Robinson have followed up on their influential book “Why Nations Fail” with the excellent “The Narrow Corridor:  States, Societies and the Fate of Liberty” (Penguin-Viking, 2019). It explains in fascinating detail why it has been so difficult for nations to do what it takes to enter and stay in the narrow corridor that leads to economic success.
 
They explain the advantages of the so-called “shackled Leviathan”. This is when the potential abuse of state power is effectively constrained by an empowered and critical civil society. This is unlike the “despotic Leviathan” that maintains essential order but does so at huge cost to a cowed and vulnerable people. China, old and new, is cited as one such example.
 
Another alternative may well be the “paper Leviathan”. This describes an expensive and incompetent government. South America provides more than a few hapless cases of governments that serve only the people on their payrolls.
The Narrow Corridor
“The Narrow Corridor:  States, Societies and the Fate of Liberty” (Penguin-Viking, 2019)
In all the many cases of national failure there is an elite who have a powerful interest in the stagnant status quo – and who resist the obvious reforms that would stimulate and sustain faster growth. Zimbabwe comes to mind as an example.
 
The authors also examine the potentially suffocating role of the “cage of norms” – well-entrenched customs that stultify access to markets and inhibit competitive forces. The caste system in India is still such an inhibitor of economic progress. Traditional land rights are a serious obstruction to producing more in South Africa.
 
Acemoglu and Robinson regard BEE as helpful to economic success because it broadened the political interest in established enterprises and business practice, enough to help protect them and the economy against destructive expropriation. Cultivating a new elite into business success was necessary for stability and growth.
 
One wonders how Acemoglu and Robinson might now react to the revelations about state capture and corruption; and to the failures of the South African state to deliver satisfactory outcomes for the resources made available to it.
 
The next question is: will the highly transformed South African elite act in the general interest and encourage the invigorating forces of meritocratic competition for resources and customers? Or will they act to protect their gains and privileges?
 
The new elite should be aware that a failing economy will not be politically acceptable and any elite dependent on it will be highly vulnerable. They should be encouraged by our open and critical society to take the steps to get South Africa back into the narrow corridor that leads to economic success.

About the author

Brian Kantor headshot

Prof. Brian Kantor

Economist

Brian Kantor is a member of Investec's Global Investment Strategy Group. He was Head of Strategy at Investec Securities SA 2001-2008 and until recently, Head of Investment Strategy at Investec Wealth & Investment South Africa. Brian is Professor Emeritus of Economics at the University of Cape Town. He holds a B.Com and a B.A. (Hons), both from UCT.

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