In “On the mechanics of economic development” (1988), the laureate economist Robert Lucas (Nobel Prize 1995) shows evidence about the enormous differences in income that exist between countries and asks what kind of actions can be implemented to close these gaps . Lucas adds that facing these kinds of questions has impressive consequences on people’s well-being and that “… once you start thinking about them, it’s hard to think about anything else.”
Countries with higher income levels have much higher standards of living: poverty is low or non-existent, the infant mortality rate is low, life expectancy is substantially higher, citizens do not live in anxiety about their personal security or the lack of respect for democratic freedoms and individual rights.
What explains the prosperity of countries? Economists usually consider that the income level of a country’s citizens is determined by the availability of physical (“machines”) and human (education) capital, per worker, as well as by technological knowledge. These three elements increase the productivity of people. The productivity of a farmer who uses tractors and mowers, and has acquired an education that allows him to use global positioning technology to better distribute seeds, is much higher than that of one who only uses his labor force and simple tools.
An essential question is: why have some countries accumulated more physical and human capital and why do they use it better? This is where institutions play a fundamental role. According to Douglas North, institutions are “the rules of the game”; that is, “the limits of human creation that shape the interaction between people”. Among the most important institutions for economic development are property rights, the judicial system, political control and anti-corruption mechanisms, and political stability. All of these “institutions provide the incentive structure of the economy” and society. When people work, sell, buy, invest or save, they do so within the framework of these “rules”. If property rights are not clear, if contracts are difficult to enforce due to a dysfunctional legal system, or if institutions do not align personal interest with the common interest, societies invest little, do not take risks, do not create jobs, and do not save. .
In Mao Zedong’s China, a cooperative agrarian model was established that was a failure. Common ownership created little incentive to invest in the land or to work hard. As a result, agricultural production fell and there was famine. By 1979, after the Great Leap Forward, land productivity was lower than it was in 1949 when the Communist Party came to power. Little by little, in some cooperatives, the farmers secretly began to divide the land among themselves. They met the required quota and retained the surplus. The authorities found out about the “crime”, but they also observed that agricultural production was higher in these cooperatives. So they decided to stop and extend the private property “experiment.” Five years later, food production had risen by 50% and 170 million Chinese were lifted out of poverty. An “institutional change” in land ownership generated adequate incentives to align private interest (aspiring to have more for the family) with the common interest (having more food and avoiding famine).
In today’s Peru we see with dismay that the few institutions that we have left continue to be undermined. Unprepared people have been placed in key institutions and we continue to lose ourselves in rhetoric and fantasies that do not generate progress. We must create “inclusive” institutions (in the sense of Acemoglu and Robinson) that generate the right incentives to move us towards progress. Will we dare?
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(Opinion) Hugo Perea: Growth and well-being