Until I finally decided to tackle it, Acemoglu and Robinson’s Why Nations Fail had been sitting on my bookshelf for two years. This voluminous book by well-respected economists from MIT and Harvard argues that man-made political and economic institutions determine economic success or failure of states. Specifically, inclusive political and economic institutions promote economic development, whereas what they call extractive institutions inhibit growth and development. What they provide is a self-consistent theory that seemingly accounts for the glaring inequality of the world. As the regular reader can probably guess, the Policy Tensor has great sympathy for this argument. Their institutional perspective on development gets much right—especially the primacy of politics—but it provides only half the picture. I will show how their own account calls for a different framing of issues. Let me start by summarizing their case.
The logic of their core argument is sound. First, no economic development is possible in a country where the state does not enjoy a monopoly of violence. Security is the basic necessary condition for development. Once this condition is fulfilled in a polity, we examine its institutions. If political power is highly concentrated, whether in a small clique or a single party apparatus, control over the levers of power allows ruling elites to “design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society.” (p. 399) Ruling cliques forge economic fiefs for themselves and their cronies; shelter well-connected firms from both domestic and foreign competition; and more generally, pursue policies in their own pecuniary interests in ways that harm overall economic performance. Without the rule of law, power elites can even engage in outright theft of public property. Lack of effective property rights and opportunities for advancement destroy the incentives for the ill-connected to innovate and advance. Predatory governments rarely preside over sustained economic development.
Meanwhile, connected insiders gain from the state’s stranglehold over the economy, which increases their staying power. Indeed, most countries outside the core of the world economy are stuck in such vicious cycles. Even after revolutions, predatory institutions persist—this is Michels’ iron law of oligarchy. “In these societies, there would be no new strong merchants or businessmen supporting and bankrolling the resistance against the existing regime in part to secure more inclusive economic institutions; no broad coalitions introducing constraints against the power of each of their members; no political institutions inhibiting new rulers intent on usurping and exploiting power.” (p. 363) Predatory institutions “create few constraints on the exercise of power, so that there are essentially no institutions to restrain the use and abuse of power by those overthrowing previous dictators and assuming control of the state; and extractive economic institutions imply that there are great profits and wealth to be made merely by controlling power, expropriating the assets of others, and setting up monopolies.” (p. 366)
On the other hand, economically successful countries have inclusive political and economic institutions that “tend to create a virtuous circle, a process of positive feedback, making it more likely that these institutions will persist and even expand.” (p. 319) Pluralistic political institutions make usurpation of power by a clique much more difficult. “Inclusive economic institutions remove the most egregious extractive economic relations, such as slavery and serfdom, reduce the importance of monopolies, and create a dynamic economy, all of which reduces the economic benefits that one can secure, at least in the short run, by usurping political power.” (p. 333) In the aftermath of the Glorious Revolution (1688), England’s increasingly liberal political institutions interacted with the diffusion of economic power to propel to the polity towards ever-greater inclusion and the economy towards innovation, setting the stage for the Industrial Revolution.
On the continent, in the aftermath of the French Revolution, liberal principles were imposed by the force of French arms. Even after the defeat of Napoleon, the clock could not be rolled back everywhere; most of Western Europe decisively embarked in the direction of more inclusive institutions. In Central and Eastern Europe, the Holy Alliance managed to hold to tide; with predictable consequences in the long run. In European offshoots in the New World and Oceania, where the native populace had been mostly wiped out, inclusive institutions emerged out of the growing autonomy of local elites. With the exception of the American South, White colonies could not be peripheralized for long. Japan had a close call. Under the threat of Western arms, the Meiji reformers launched systematic reforms that transformed Japan from an ossified feudal society to a modern one; heavily borrowing institutional innovations from all over Western Europe. Japan was the only major non-European country to escape European coercion. Not coincidently, it was the only country outside of Europe and its offshoots to industrialize in the late nineteenth century.
The authors debunk geographic/climatic and cultural theories of economic development by pointing to variations that cannot be accounted for by such factors. The Korean peninsula furnishes an elegant natural experiment. The two Koreas cannot be said to differ in climate, culture, and natural endowment. What accounts for the great divergence in their economic fortunes is institutional differences. North Korea is a one-party state that presides over an extractive economic system that provides few incentives for economic actors to innovate and increase productivity. The American protectorate south of the 38th parallel is characterized by the rule of law and an increasingly democratic system where political power is widely distributed. South Korea has enjoyed an outward-oriented open economy that provides great incentives for economic innovation. The political and economic institutions of the Koreas not only account for their divergent trajectories, they are also tightly coupled. The repressive North Korean regime cannot survive unless it maintains draconian control over the economy; an open economy would empower autonomous economic elites who may challenge the ruling group’s monopoly on power. Similarly, the diffusion of economic power in South Korea allowed a successful transition to competitive politics.
So what is my beef with Acemoglu and Robinson’s theory? I agree that institutions determine whether nations succeed or fail. But where did these divergent institutions come from? As they themselves painstakingly document, in most of Asia, Africa, and South and Central America, these institutions were imposed from ‘above’ by heavily-armed Europeans. The masters “sowed the seeds of underdevelopment in many diverse corners of the world by imposing, or further strengthening existing, extractive institutions. These either directly or indirectly destroyed nascent commercial and industrial activity throughout the globe or they perpetuated institutions that stopped industrialization.” (p. 250)
After the abolishment of the slave trade in 1807, “slavery, rather than contracting, appears to have expanded in Africa throughout the nineteenth century…[in western Africa] 30 percent of the population was enslaved in 1900.” (p. 257) This was because African states had morphed into slaving states. African polities became “organized around a single objective: to enslave and sell others to European slavers.” (p. 253) “What were all these slaves to do now that they could not be sold to Europeans? The answer was simple: they could be profitably put to work, under coercion, in Africa, producing the new items of legitimate commerce.” (p. 256)
In the apartheid regimes of South Africa, Rhodesia, and the post-Civil War American South, the black population was systematically excluded from participation in economic development; with unsurprising long-term outcomes. In South Africa, “No African was allowed to own property or start a business in the European part of the economy—the 87 percent of the land.” (p. 268) Contrary to Lewis’ dual economy development model, “In South Africa there would be no seamless movement of poor people from the backward to the modern sector as the economy developed. On the contrary, the success of the modern sector relied on the existence of the backward sector, which enabled white employers to make huge profits by paying very low wages to black unskilled workers.” (p. 269) In the American South, “Disenfranchisement, the vagrancy laws such as the Black Code of Alabama, various Jim Crow laws, and the actions of the Ku Klux Klan, often financed and supported by the elite, turned the post-Civil War South into an effective apartheid society, where blacks and whites lived different lives. As in South Africa, these laws and practices were aimed at controlling the black population and its labor.” (p. 356)
In Southeast Asia, the Dutch imposed hitherto unprecedented predatory institutions: “With the military power of the company now brought to bear, the Dutch proceeded to eliminate all potential interlopers…They expanded to the northern Moluccas, forcing the rulers of Tidore, Ternate, and Bacan to agree that no cloves could be grown or traded in their territories.” (p. 247) “By the end of the seventeenth century, the Dutch had reduced the world supply of these spices by about 60 percent and the price of nutmeg had doubled. The Dutch spread the strategy they perfected in the Moluccas to the entire region, with profound implications for the economic and political institutions of the rest of Southeast Asia. The long commercial expansion of several states in the area that had started in the fourteenth century went into reverse.” (p. 249)
“India was the largest producer and exporter of textiles in the world in the eighteenth century. Indian calicoes and muslins flooded the European markets and were traded throughout Asia and even eastern Africa.” (p. 272) British textile producers prevailed on Parliament to ban the import of calicoes. It was under the protection of the state against Indian competition that textile manufacturing could grow in northern English towns and the Industrial Revolution commence. The flip-side was the deindustrialization of India. Meanwhile, in India, “The East India Company looted wealth and took over, and perhaps even intensified, the extractive taxation institutions of the Mughal rulers of India.” (p. 272) The supremacy of the landlords in the countryside was enhanced and institutionalized first by the Company, and after 1858, even more robustly, by the Crown. This strengthened the forces of seigniorial reaction in rural India; which after independence thwarted all attempts by the progressive elements of the Congress to initiate land reforms. While Great Britain’s imperial trade policy was de-industrializing India and its imposed land revenue systems were forging an entrenched landed oligarchy in the countryside, colonial forest policy was decimating India’s hitherto thriving aboriginal tribes of forest dwellers. According to Maddison’s data, per capita income in the United Kingdom trebled in the century leading up to the outbreak of World War I. In the same period, British India’s per capita income stagnated, rising a measly 26 per cent.
My beef then, is with Acemoglu and Robinson’s exclusion of the element of domination in their model. Despite their documentation of the ‘development of underdevelopment,’ asymmetries of power play no explicit role in the model. What you have is N countries with varying endowment. To predict whether a nation is rich or poor, you first inspect whether the state enjoys a monopoly of violence. Then you inspect its institutions. If they are inclusive, it is likely to be rich; if they are predatory, it’s likely to be poor. But as they themselves argue, ‘the weight of history’ is such that institutions persist over very long periods of time. “The institutional dynamics we have described ultimately determined which countries took advantage of the major opportunities present in the nineteenth century onward and which failed to do so. The roots of the world inequality we observe today can be found in this divergence.With few exceptions the rich countries of today are those that embarked on the process of industrialization and technological change starting in the nineteenth century, and the poor ones are those that did not.” (p. 301)
But few countries had the autonomy to choose to take advantage of these opportunities; most were forced to fail at gun point. This is where geography and material endowments come back into the picture. Not directly as the authors allege, but indirectly, in terms of who got to point the gun at whom. Geopolitical realities govern power relations among states. And it is for this reason that the northern temperate zone contains all the great powers and most of the world’s wealth.
If one were to frame the issue more precisely, the principles of economic development would be as follows. First and foremost, the state must be able to impose a monopoly of violence in its territory. No development can take place without security. Most of the “least developed countries” suffer intermittent civil wars. Second, the state must enjoy a sufficient degree of autonomy; enough to be able to shape its own institutions. Whether this autonomy is achieved under the protection of a dominant state (post-war Europe, Canada, post-war Japan, South Korea), or because the state is too remote to invite the attention of predatory powers (Botswana, Bhutan, New Zealand), or because the state is strong enough to fend them off (Meiji Japan), is irrelevant.
Once these two conditions are fulfilled, what matters most are political institutions. The state must be subject to the rule of law. In particular, there need to be institutional constraints on the arbitrary exercise of state power; especially with regards to the state’s ability to deprive its populace of property. If material resources are highly concentrated, the oligarchs will use their wealth to control the state. The distribution of wealth thus needs to be broad enough to allow for competing centres of private power; enough to thwart attempts by any clique to gain control of the coercive apparatus of the state. Once a liberal polity is in place, the rest depends on economic institutions. Open economies where firms are not protected against the forces of creative destruction are very likely to be successful. The key point here is to realize than economic development depends on the growth of productivity. And productivity depends on the incentives facing economic actors to innovate and compete.
Acemoglu and Robinson are not the only ones to ignore the element of domination. Thomas Piketty likewise abstracts away from power relationships to concentrate on demographics and capital friendly policies; not that it is an invalid mode of investigation. In Ellen Wood’s telling, the element of domination plays a negative role in the long march of capitalism. It is entirely classified as “extra-economic coercion.” This is why I want to write a book called A Natural History of Capitalism. I want to bring the element of domination to the center of the frame; where it belongs.