Why do some economies grow, while others don’t ?

Why do some economies grow, while others don’t?

In his magnum opus, “The Origins of Political Order,” Francis Fukuyama argues that democracy is a stool that stands on three legs: a centralized state, political accountability of the state’s leaders, and the rule of law. Without any one of these elements, democracy is not possible. By happenstance, those three factors correspond to the three branches of US Government—executive, legislative, and judicial. Contrary to some utopian dreams, a truly weak state doesn’t safeguard liberty. It facilitates the rise of gang warfare and the rule of tribal warlords.

There are three factors are essential for economic growth that roughly correspond to Fukuyama’s three political preconditions. A stable currency is like a strong government, and is necessary for economic exchange and for people to be able to make long-term plans. Political accountability is like market accountability, both via a free marketplace for goods and services, and via the daily price feedback that securities markets deliver. Respect for property rights and economic property in particular, is analogous to the rule of law. A strong bankruptcy regime is also necessary to keep productive assets working.

In 1952, when President Truman nationalized the steel industry in to avert a strike, the Supreme Court ruled that the President didn’t have the authority to do this, in spite of the nation’s need for this strategic commodity during the Korean War. Thus did the rule of law protect property rights in our democratic system. Never mind that thirty years later most of these strategic assets went bankrupt.

A stable currency, market accountability, and robust property rights are essential infrastructure for economic prosperity. Countries that establish and maintain these institutions will prosper.

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By | 2012-07-31T08:40:42+00:00 July 31st, 2012|Global Market Update, Investing, Investing|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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