Nations do not flourish primarily because they are well endowed with natural resources. Geography, climate, culture and natural resources matter, but at the margins.
There is ample evidence, with several compelling longitudinal case studies in history to substantiate that point.
Korea was one people, one culture, one geography in 1945. Today, South Korea is 50 times richer than the North.
The city of Berlin offers perhaps the closest thing to a pure laboratory “experiment” of all. Here was a single city – same people, same language, same industrial heritage, facing the same rubble in 1945 – split down the middle by an accident of military occupation.
Within a generation West Berliners drove Mercedes, BMWs and Audis, whereas their Eastern cousins had to wait for 15 years to take delivery of a Trabant. The gap grew so visible, so undeniable over time, that the East German state had to build a wall not to keep enemies out but to keep its own citizens in.
Then there is the Argentina and Australia case study, which shows how differing institutions divide near-identical starting points.
In 1900, Argentina and Australia were twin economies: vast, temperate, resource-rich settler nations, both among the richest countries on earth per capita, both feeding and clothing the world from fertile plains.
Australia built durable, impartial institutions – an independent judiciary, a professional civil service, stable democratic transitions – and, crucially, when its post-war protectionist model ran out of road, it found the political means to reform, opening its economy up in earnest from the 1980s onward and locking in decades of unbroken growth.
In comparison, Argentina fell into a cycle of institutional volatility: coups and constitutional ruptures, courts bent to executive will, property rights that shifted with each government and repeated resort to inflation and default as instruments of policy.
Same endowments, same era, same opportunities in the world economy – but one country made its rules predictable and its politics self-correcting, while the other made both negotiable and unstable.
Nations flourish when they build effective, inclusive, democratic institutions: secure property rights, enforceable contracts, impartial courts and constraints on those who hold power.
Beneath all of this lies something harder to legislate: trust.
Trust is both a cause and a consequence of good institutions.
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A useful recent illustration comes from a large panel study covering 113 countries from 1995 to 2022, examining what actually predicts long-run income per capita once you control for the usual suspects.
The finding, put simply, is that the rule of law, control of corruption and judicial effectiveness are among the strongest predictors of per capita income, even accounting for other national characteristics and global shocks.
Political ideology matters, in that it shapes the size of the state and its openness to trade. But its effect on growth is substantially absorbed by the strength of the underlying institutions and the commitment to preserving them.
As the authors of that study put it, a government of the right with weak institutions rarely produces a genuine economic boom and a government of the left with strong rule of law rarely produces a crisis.
China is the standing counter-example thrown at anyone who makes the case I am making.
It has produced extraordinary growth over four decades while ranking, on the most recent World Justice Project index, 92nd in the world for rule of law.
China’s institutions are not weak in the sense of lacking capacity. They can design, decide and enforce with formidable effectiveness. What they lack, by deliberate design, is what we mean by the rule of law: independent adjudication, transparency and binding constraints on the exercise of state power.
Growth can indeed occur for a period without those features, where a state substitutes administrative discretion, forced savings and a determined industrial strategy for the predictability that the rule of law would otherwise provide.
But it is worth noting two things.
First, that model has real costs – misallocated capital, the economic risks associated with overcapacity because of production decisions that are too insulated from market signals, non-performing loans and a growth trajectory now visibly decelerating as the low-hanging fruit of catch-up growth is exhausted.
Second, and more important for this room, China’s path is not an available alternative for economies such as ours – nor one we would want.
For open, rules-based, trade-dependent economies the rule of law and institutional capacity and strength are the core foundation of strong economic development and growth.
The nations that flourish are those that have found ways, through crisis, leadership or good luck, to make democratic rules self-enforcing, so that prosperity no longer depends on the virtue of any individual but on the architecture of the system itself.
(
From an edited extract of the 2026 Quayside Chambers Oration delivered by Mathias Cormann, secretary-general of the OECD and the longest serving finance minister in Australia – serving under the Abbott, Turnbull and Morrison Liberal governments – to a private gathering of lawyers and judges in Perth on Wednesday.)
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