Good governance

I was recently in Sweden and visited the Nobel Prize Museum in the old town of Stockholm. There I came across the epic book by Daron Acemoglu and James A. Robinson’s Why Nations Fail: The Origins of Power, Prosperity and Poverty, through which the Sveriges Riksbank Prize in Economic Sciences, in memory of Alfred Nobel (commonly referred to as the Nobel Prize in Economics), was awarded.

This book presents a compelling thesis that a nation’s prosperity is determined not by geography, culture or the ignorance of its leaders, but by its political and economic institutions. The book claims that nations achieve wealth and success when inclusive political institutions foster inclusive economic institutions. These inclusive systems disperse power, provide secure property rights, enforce the rule of law, and offer incentives for people to innovate and create wealth. Conversely, extractive institutions, which concentrate wealth and power in the hands of a small ruling elite, sentence a nation to persistent poverty.

The authors support their theory with numerous historical case studies, starting with the stark contrast between the two parts of Nogales, a city split by the US-Mexican border. Despite being in the same geographical and cultural area, the US side is significantly richer and healthier due to its different institutional setting. The book traces the origins of this divergence to the different colonisation strategies of the English and the Spanish in the Americas. While the Spanish established a system to extract resources and coerce the indigenous population, the English in North America were forced to create different institutions that provided incentives and personal freedom for settlers. This historical difference in institutional formation paved the way for the different development paths of the United States and Mexico.

Acemoglu and Robinson also discuss what they call critical junctures, which are random historical events that exploit existing small institutional differences and lead to diverging development paths. Examples include the bubonic plague and the Industrial Revolution. The book explains how extractive institutions, while sometimes capable of generating temporary growth (as seen in Soviet Russia), ultimately lead to unsustainable development because they stifle innovation and creative destruction. To achieve lasting prosperity, a nation needs to overthrow ruling elites and distribute power and political rights evenly throughout society. The book concludes by highlighting the virtuous and vicious cycles of prosperity, where inclusive institutions create positive feedback loops that reinforce and expand them, while extractive institutions create negative loops that prevent progress.

The principles outlined in Why Nations Fail are highly relevant to Malta, a nation that has achieved significant economic success but must continuously safeguard its institutions. Malta has seen remarkable economic growth, but its long-term prosperity is directly linked to maintaining and strengthening its inclusive political and economic institutions.

A strong, inclusive institutional framework is a prerequisite for a thriving economy. This includes essential elements such strong and continuous social dialogue on all aspects, the rule of law and an efficient and well-resourced judiciary. These institutions reduce uncertainty and provide the stability needed for businesses and individuals to invest, innovate and create wealth. The presence of these institutions creates a virtuous cycle, where economic growth reinforces the demand for good governance and pluralism, further solidifying the country’s prosperity.

Good governance is not merely about having a legal framework, but about the palpable presence of discipline and enforcement that is felt without fear or favour. This means that a government’s commitment to the rule of law must be evident in its actions, not just its words. Democracy, in this sense, is far more than the act of voting every five years; its true strength lies in the integrity and independence of its institutions. These institutions, such as the judiciary, the media and law enforcement, must be strong to act as true checks on power and ensure that all citizens, regardless of their position, are subject to the same standards of law.

The above-mentioned book also serves as a warning against the dangers of institutional decay. If there is a decline in good governance – where the rule of law is weakened, and political power becomes concentrated in the hands of a narrow elite – it can lead to an extractive system. In such a scenario, wealth extraction by a few for personal gain would replace wealth creation for the many. This would ultimately lead to a vicious cycle where progress is stifled, and the nation is put on a path towards ruin.

For a country like Malta, a failure to uphold good governance could have severe consequences. The trust of the public and the international community in Malta’s institutions is crucial for its economic stability and continued growth. Businesses rely on a stable and predictable environment to operate. Weak governance creates an environment of uncertainty that can discourage investment and innovation.

The lesson from Why Nations Fail is clear: economic success is not guaranteed. It is a fragile achievement that must be constantly protected by strong, inclusive institutions. For Malta to secure its future, it must resist any trends that could lead to extractive practices and ensure that its political and economic institutions remain pluralistic, accountable and transparent. The path to continued prosperity lies in a steadfast commitment to good governance and the empowerment of its people, ensuring that political and economic power is dispersed rather than concentrated.

Otherwise, closing an eye to a lack of good governance, would ultimately risk undoing the country’s development and push it toward the same poverty trap that has ensnared many other nations. This is why the Malta Chamber has been hampering with various researched position papers on the importance of good governance.