Photo: Boston, January 2024

One of the longest debate that was going on in my mind is this question: Can you have economic prosperity without democracy? Can democracy lead to prosperity?

This question has perplexed since my college years. Many people pointed to China and say “Look. Here is a country that has no democracy but is prospering.”

Fortunately, after near 30 years I have found an answer in the book “Why Nations Fail?”.

The authors Daron Acemoglu and James Robinson show that there is an inherent relationship between the political system of a country and its economic status.

In particular, they use the term “Extractive vs. Inclusive” systems. The extract economic institutions are those that monopolize economic resources and economic opportunities in the hands of a few people.

Extractive political institutions supporting extractive Economic Institutions are going to be those that concentrate political power and political opportunity in the hands of a few people.

Hence there is a synergistic relationship: One will see inequities and extraction at the economic level if you have inequities and an unequal distribution of political power at the political level.

On the opposite side, inclusive economic institutions need a political system that is equally egalitarian in who has political power, i.e. inclusive political institutions. Inclusive political institutions most clearly captured by the ideal of democracy are going to work well with inclusive Economic Institutions. Conversely inclusive economic institutions are much more likely to be supported by inclusive political institutions.

Another important point the authors point out is that inclusive economic growth have proven much more sustainable and durable than extractive economic growth. The extractive economic and political institutions tend to be more short-lived.

That is a powerful message. If the authors are right, then China’s best days are probably behind us, having prospered for 40 years.

Speaking of China, I thought about what Ray Dalio’s view on the new world order. I need to think a bit more on how to reconcile his view with this theory. Are they contradicting to each other? Or they are consist with each other? How and why?

To get a 10 minute brush-up on this wonderful book by Acemoglu and Robinson, here is the video: