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How rich countries die

March 17, 2009

Mancur Olson, the author of his still in print since 1982 book, The Rise and Decline of Nations-Economic Growth,Stagflation and Social Rigidities, has delivered the work of his lifetime on the theory of Collective Action.
[Psst… Mancur Olson if you weren’t aware,he was one of the leading American Economists at the time of his death and mostly… well, mostly.. he ruminated over the way how we ‘herd’ so easily and its effects]
[Pssssstttt…. This is a long post, if you just want to take the juice out of this post click here]

An intensely realistic book, arguing the reasons, political, economical and sociological aspects of rise of the nations. Why do they fail, how do they rise and the associated questions along with it.Surprisingly he goes on to prove them with amazing clarity and existing scientific ways.

He argues, decisively:

  1. US, contrary to popular beliefs, in 1950’s was not the only growth engine of the world. France and Germany registered far higher growth rates than US, and could be very well named the growth dynamoes of the world. But it didn’t come clearly fall into the eye sight because of the lesser amount of population growth while compared to US.
  2. Perhaps forming as a necessary background, point 1 sets the stage and the mood for what could be seen as a breaking of myths and existing understandings. He talks about his most groundbreaking work, the Logic Of Collective Action, the apparent role Special Interest Groups play in the regression of the economy.
  3. What are special interest groups? Its exactly what its name suggests. Its a group/lobby/kin/association/union formed to protect and progress the interests of a special group. Usually, lobbies,unions and associations play the part in the system. He argues, what can be an obvious point that such SIGs continue to reduce an economy’s efficiency and become a drag on the GDP of a nation.Even Adam Smith colluded that businessmen rarely met without “conspiring” against public interest. It makes sense for oil companies to work together and form a lobby which will further their interests with the government for non renewable energy. Their payoff is : The billions generated minus the millions paid to the lobbyists. And this is one reason why India/developing country continues to suffer even more. The necessity of atleast convincing fellow businessmen to pursue a throughly detrimental idea(not only to public even to the sector) is short circuited by the precense of  policy makers who can be bought and bribed with far less and easy money.
  4. On the contrast, the public cannot lobby because the net payoff generated is too less when compared to that of the SIGs. If even the oil companies lobby will be fought by that of an equal lobby by the common public, then though oil companies continue to skirt in the positive payoff area[revenue generated minus cost of lobbying], public always continues to skirt in the negative payoff area [revenue generated is zero, cost of lobbying is huge]. This forms an effectively negative scenario for public. Though there are ways to make public sit up, stand up a la’ Erin Brockovich but still there is/was a definite lure of revenue generated in the outcome. Which gives rise to another aspect of developing nations. The crumbling social justice delivery system.
  5. Marcur Olson, continues to see labour unions with the least flattering view. He rightfully argues, Labour Unions are a drag on the economy[very true], but it can be an even higher drag, if the same labour union is formed by 10% of constituting industries in any sector. i.e rather than have a labour union of Indian, Jet Airways and Kingfisher, form a “maha” union with only 10% of the labour work force of each one of those companies being represented. The monolith union can still have a vestigial interest in keeping the host afloat [for after all, its existence and benefit is derived from the existence of its host] but the precense of a giant ‘monolithic’ union will only kill a sector because it can drive up compensation even 10 to 20 times even without killing the host company[because it just represents 10% of the workforce]
  6. The rise and growth of such SIGs can be a very interesting observation at the very least. Olson argues that the older a country is, the entrenched it is in complacency and thus form a fertile bed for such unions.He cites that it was in 1851, almost a century after the Industrial Revolution, did the first trade union formed in Britain. Similarly the President of US might like to see an all encompassing legislation for the nation, but individual Congressmen might push for an ever encouraging bill to promote an already sick auto industry[by doling out bailouts, reducing tariffs etc].
  7. Unions and association continue to drag the economy, because its actions directly affect the nation’s growth by extracting a cost. Hence the net payoff for the lobby  is: 100% of the benefits minus a fraction of the cost. The cost gets divided among all the constituencies[in case of Indian politics] or get factored in as an opportunity cost, if the nation fails to recognise an opportunity, [say the opportunity of encouraging renewable energy]. In case of auto makers of US, those lobbying for bailouts will continue to derive the benefits of staying afloat minus the fractional cost of drained resources from national coffers which otherwise could have been used in a better way. The bottomline is:
    • Unions drag the economy.
    • The older a society is, the more complacent it is, the higher the possibility of formation of SIGs
    • Unions always skirt in positive payoff ratio by cashing in the entire benefit of skewed policies while continuing to pay just a fraction of a cost.
  8. Olson says,  Japan and Germany instead of being old economies before the Second World War, the defeat changed their entire society. It created a new society and almost gave birth to a new nation. The special interest groups died a cold death and evolved into an all encompassing wide interest group interested in overall development.
  9. Great Britain, a nation immune from a military defeat, dictatorship, upheaval, political coup for the longest is the most entrenched in the lobby of SIGs. And quite rightfully it can be observed that it registered the lowest growth among the developed countries.But he cites, that low growth isn’t what is etched permanently in the national psyche of Britain. It registered the fastest growth from 1750 to 1850[incidentally 1851 saw the formation of  the first British trade union]

Closing Words
All in all, its a must read book, very informative, breaks a lot of notions, existing, verbal as well tacitly assumed. The only takeaway from this for a common Indian is :

1. Become an  influential component of society. or
2. Migrate to new countries. or
3. Migrate to newer parts of the countries or
4.Take jobs in newer sectors, or
5. Move to New Delhi and become a politician.

With inputs from Phillips Greenspun’s Blog: How Rich Countries Die [hattip @bonchibuji]

3 Comments leave one →
  1. March 22, 2009 5:14 am

    Keep working ,great job!

  2. March 26, 2009 10:31 am

    I have the same opinion as yours on this. What you said is true.

  3. stock market chart permalink
    April 3, 2009 2:47 am

    I learned something here. Thanks for posting.

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