Why nations win: A legacy of independent institutions

As India charts its course towards the vision of Viksit Bharat, it is worth reflecting on the enabling ecosystems that sustain developed societies. Nobel laureate James A. Robinson (Economics, 2024) has argued that nations prosper when they build inclusive political and economic institutions that distribute power broadly and foster innovation.

Illustratively, the United States demonstrates how decentralised institutions endure across generations. Federalism disperses authority, courts remain independent, regulators are credible, and local autonomy is strong. Leaders matter, but prosperity does not rest solely on their shoulders. The legitimacy of American leadership derives from institutions that outlast individuals, preventing power from concentrating in one place. The recent Trump-Mamdani meeting underscored this point: even a powerful president found it natural to invite the mayor-elect of New York City – several rungs below him in hierarchy – to discuss differences. Such engagement reflects institutional strength.

Germany’s postwar trajectory offers another lesson. After the 1945 split, West Germany rebuilt inclusive institutions; its Bundesländer or federal States anchored in democracy, market competition, the rule of law, and an independent judiciary. These semi-sovereign units dispersed authority, fostered innovation, and ensured prosperity. East Germany, under Soviet influence, imposed centralised planning, suppressed dissent, and concentrated power. By the 1980s, the contrast was stark: West Germans enjoyed rising living standards and global integration, while East Germans endured stagnation and shortages.

Crucially, decentralisation in West Germany embedded accountability locally and anchored stability through institutions like the Bundesbank and the Mittelstand, ensuring resilience even amid energy shocks. Leaders mattered, but institutions absorbed transitions, safeguarding prosperity from the whims of any single successor. Following reunification in 1990, the reintroduction of federated states to the eastern section gradually helped normalise prosperity across the country. This process was uneven and took time, but it underscored how decentralisation can heal divides and anchor stability in a unified polity.

Argentina’s story illustrates the opposite. At the dawn of the 20th century, Argentina was among the world’s most prosperous nations. Its per capita income rivalled that of the US, and Buenos Aires was celebrated as the “Paris of the South”. Yet this promise unravelled. The Great Depression exposed weaknesses, and the 1930 coup began a cycle of military interventions. Instead of building resilient checks and balances, Argentina relied on charismatic leaders. Juan Perón’s rise in the 1940s brought welfare programmes and industrialisation, but also entrenched centralised control and politicised institutions. Short-term gains discouraged competition and innovation. By the 1980s, hyperinflation devastated savings, and the 2001 sovereign default shattered investor confidence. Scholars call this the “Argentine paradox”: a nation that began the century rich but ended it unstable and underdeveloped.

Pakistan in the 1960s was hailed as a model of development. Under Ayub Khan, the economy grew rapidly, buoyed by the Green Revolution and foreign aid. Yet power was concentrated in the executive, parliament was weak, and bureaucracy politicised. Wealth clustered among a few industrial families, while East Pakistan lagged. The 1965 war strained resources, unrest mounted, and in 1971, East Pakistan broke away to form Bangladesh. Bhutto’s nationalisation discouraged investment, and growth slowed. What appeared to be impressive progress proved fragile because institutions were neither decentralised nor independent. Without strong checks and balances, the system faltered under pressure, and decline followed.

China’s transformation after 1978 shows how institutional choices, combined with decentralisation, can succeed in a different context. Deng Xiaoping dismantled rigid planning and introduced reforms. The household responsibility system gave farmers property-like rights to land use. Special economic zones, such as Shenzhen, attracted significant foreign investment. Decentralisation allowed local officials to experiment with market policies. Over time, adaptability was embedded into governance, fiscal institutions, and banking. Provinces and municipalities competed for investment and growth, unlocking productivity and propelling China’s rise.

The lessons are clear. Argentina, East Germany, and Pakistan show how prosperity built on centralised power unravels once its limits are reached. By contrast, the US, West Germany, and China demonstrate how prosperity rooted in decentralisation and strong institutions endures across generations. Without independent courts, credible regulators, and local autonomy, growth relies solely on individuals – and when they falter, gains are lost. Where institutions are created and protected, prosperity becomes broad-based and lasting.

Viewed from this perspective, India’s model uniquely combines political decentralisation with centralised economic management and limited executive accountability. This created stability but restricted growth in the early decades until liberalisation in the 1990s unleashed strong GDP expansion. Yet we now face a paradox: prosperous urban islands coexist uneasily with rural distress. Alongside, mass migration fuels disorganised urbanisation, increasingly burdened by chronic pollution and strained infrastructure. The challenge is not merely administrative but, perhaps, institutional design. A course correction may thus be needed – one that strengthens decentralisation and effectiveness, embeds accountability, thus ensuring that prosperity is not confined to enclaves but shared across society.

The writer is the former chairman of the Export Import Bank of India is a banker with a theory of everything.

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.