The Key Insight: Fiscal Governance and the Rise and Fall of States

How does fiscal governance decide the rise and fall of states?

Mian Ashiq Hussain's key insight is that a state's fortunes follow its fiscal and financial governance. As people gained a real say in how they are governed and taxed, the wealth of nations grew far faster, so wider public participation in policy is, in his view, what drives prosperity.

History in perspective reveals that rise and fall of states have correlation with their fiscal and financial governance. The rise of self-governance gradually led to exponential growth of wealth of nations. ‘It took 1000 years for the World GDP to double during the millennium ending at the close of the 18th century; the World GDP doubled in only 100 years during the 19th century; the first century after the Industrial Revolution. It quadrupled during the 1900s as the human race further increased its capabilities to shape its destiny. And now in the 21st century, the World GDP is slated to jump by eight times…’. Evidently, greater participation of people in policymaking snowballs prosperity.

Why is the US Constitution so hard to change?

The author argues that the US Constitution, once celebrated worldwide for separation of powers and judicial review, is exceptionally rigid. Its biggest reforms, such as ending slavery and extending civil and voting rights, came only after the Civil War, and he cites critics who argue that layered vetoes now let a small elite block change.

Against the backdrop of absolute authority of monarchs, the principles of limited government, separation of powers, judicial review, checks and balances adopted in the Constitution of United States of America were globally celebrated as outstanding innovations of 18th century. Other nations copiously imported and emulated such epoch-making ideas in their models of governments. For the first almost seven decades, the US Constitution thoroughly transformed the state and society. Over the time, fundamentally changed sociopolitical circumstances required further innovations. However, unlike smooth sailing of the Swiss system, the US constitution is exceptionally rigid. The momentous changes such as “Abolition of Slavery”, “Civil Rights”, and “Black Suffrage”, through 13th, 14th and 15th Amendments to the Constitution came about only in the wake of the protracted bloodshed of the American Civil War between its northern and southern states from 1861 to 1865.

By and by, the US Constitution, which was acclaimed to be the “most valuable export to the world,” is now being considered to be an obstacle to change. The US constitutionalist Robert Ovetz made out a case that a tiny economic interest group has firmly established elite capture of economic resources by invoking constitutional checks as insurmountable series of vetoes: the House committees may block public welfare legislative measures; either House may block a Bill or water it down through amendments; even if a Bill is passed after several amendments, the President may withhold his assent to the Bill while the events of overriding the Presidential veto by super majority of two-thirds of both the Houses of the Congress have been rare. To crown all, the majority of the conservative judges of the Supreme Court may void the laws passed by the Congress. Thus, the ordinary prospects of progress of the US Constitution are purported to be negligible. It would take a war, an economic panic, great social turmoil or the Great Depression to persuade the people in power to adopt incremental modifications of the system. Resultantly, the gulf between the will and welfare of the majority of the US people and its constitutional working has kept widening. According to American critics like Harvard professor Larry Lessig, representative character of the US democracy, too, has increasingly waned. The Nobel Laureate Josephe E. Stiglitz epitomized the US democracy as ‘the government of one percent by one percent for one percent’. Exclusion of predominant majority of the people from policymaking naturally fuelled extreme income and wealth disparities – having far-reaching impact on the economy as a whole.

Jimmy Cartar, a former president of the United States, called upon Americans to unite to heal the drift from the historic political and moral values that they had espoused during the previous 230 years. An extract particularly relevant to the subject matter reads: “Our government has abandoned fiscal responsibility by unprecedented favours to the rich, while neglecting America’s working families. Members of the Congress have increased their own pay by $ 30,000 per year since freezing the minimum wage at $ 5.15 per hour – (the lowest among industrialised nations).”

Should every generation revise its constitution?

Thomas Jefferson proposed that each generation revise the constitution, but the American founders did not adopt the idea. The author points to Switzerland, where the people can revise their constitution, as a country that kept governance in step with social change. For him, an evolving social contract keeps a state stable.

For maintaining equilibrium between developing social, environmental and constitutional growth, Thomas Jefferson proposed periodical revision of the Constitution by every generation. The proposal for a highly flexible Constitution was, however, not adopted by the American Founding Fathers. Later on, Switzerland adopted the idea of constitutional revisions by the people and benefited from a self-evolving poise between its governance and social changes. In a nutshell, progress of the social contract in step with socio-economic developments is the key to stability of a state and welfare of its people.

What explains China's rise, in the author's view?

The author credits China's gradually evolving system, including directly elected village and town congresses, with lifting 800 million people out of poverty. He argues that what matters is how institutions actually work, not how academics label them, and that systems releasing people's productive energy are the ones that rise.

Gradually evolving system of People’s Republic of China enabled it to lift 800 million people out of poverty. Preamble of the Constitutions of the People’s Republic of China defines its government as “the people’s democratic dictatorship”. However, the terminology of democracy and dictatorship may not always reveal the whole truth. In China, the representatives of the lowest level of Local People’s Congresses at village and town level are directly elected by their constituencies. The upper-level congresses are indirectly elected by the lower tiers of Local People’s Congresses. Although China has its peculiar system of representative governments, it is markedly different from western liberal democracies. The visionary Founding Father of Singapore Lee Kuan Yew expressed his views in an interview: ‘political systems cannot safely be transplanted in alien lands’. According to him, ‘if China had become a western liberal democracy, it would collapse’. However, he predicted that spectacular technical developments and expanding affordable means of communication and transportation will certainly transform the Chinese state and society. Sustainable progress is not feasible without a predictable governance of a modern state. Thus, China will naturally move towards the rule of law instead of the rule of the emperor. China’s economic miracle and shared prosperity of its people reveal that decisive transformative factor is how an institutional network operates rather than how academics narrate it. A system that frees productive capacities and unleashes creative energies of its people is the key to the rise of the

Frequently asked questions

What is the key insight of How Constitutions Flourish or Fail?

The book's central claim is that states rise and fall with the health of their fiscal and financial governance. When ordinary people share in decisions about public money and policy, prosperity grows quickly; when an elite captures those decisions, inequality widens and the whole economy suffers.

Why does the author call the US Constitution an obstacle to change?

He notes that critics now see a series of vetoes in Congress, the presidency and the Supreme Court that a narrow economic interest can use to block welfare laws. Because amendment is so difficult, he says major reform has tended to need a war, a depression or deep social upheaval.

What did Thomas Jefferson propose about constitutions?

Jefferson suggested that each generation should revise its constitution so that it keeps pace with social, economic and environmental change. The American founders rejected such a flexible design, but the author highlights Switzerland as a country that later let its people revise the constitution and benefited from doing so.

How does the author explain the rise and fall of nations?

In his account, nations prosper when their governance frees the productive and creative capacity of their people and keeps public finances accountable to them. They decline when power and resources are concentrated in a few hands and the majority is shut out of policymaking.

Related Minds

• Why Nations Fail: A Fiscal Answer
• Why Constitutions Fail, and What Makes Them Flourish
• Constitutional Amendments in Pakistan: Who Holds the Pen?
• Does Trickle-Down Economics Work? Tax, Inequality, Growth
• The Partition of Bengal and the Inadequacy of Revenues

Read the full argument in the book How Constitutions Flourish or Fail by Mian Ashiq Hussain.