Why Nations Fail - Part II

            This post is the summary of the same book from last week, published at  http://norayr.am/collections/books/Why-Nations-Fail-Daron-Acemoglu.pdf

            For economists, Argentina is a perplexing country. To illustrate how difficult it was to understand Argentina, the Nobel Prize-winning economist Simon Kuznets once famously remarked that were four sorts of countries: developed, underdeveloped, Japan and Argentina. Kuznets thought so because, around the time of the World War I, Argentina was one of the richest countries in the world. It began then a steady decline relative to the other rich countries, but the reasons for its decline become clearer when looked at through the lens of inclusive and extractive institutions. It is true that before 1914, Argentina experienced experienced around fifty years of economic growth, but this was a classic case of growth under extractive institutions. Argentina was then ruled by a narrow elite heavily invested in the agricultural export economy. But it was not sustainable. Between 1930 when there was its first military coup and 1983, Argentina oscilated between dictatorship and democracy and between various extractive institutions. There were mass repression under military rule, which peaked in the 1970s with at least nine thousand people and probably more being illegally executed. Hundreds of thousands were imprisioned and torture. During the periods of civilian rule there were elections. But the political system was far from inclusive. Since the rise of Perón in the 1940s, democratic Argentina has been dominated by the political party he created. The Peronists won elections thanks to a huge political machine, which succeeded by buying votes, dispensing patronage, and engaging in corruption, including government contracts and jobs in exchange for political support. In a sense this was a democracy, but it was no pluralistic. Power was concentrated in the Peronist Party. Economic policies and institutions were designed to deliver income to their supporters, not to create a level playing field. There is little check on Argentina presidents and political elites, and certainly no pluralism. The elections have not brought either inclusive political or economic institutions is the typical case in Latin America. Perón and dozens of other strongmen in Latin America are just another facet of the iron law of oligarchy, and as the name suggest, the roots of this iron law lies in the underlying elite-controlled regimes. Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. This is true today in Africa, in countries such as Zimbabwe and Sierra Leone in Latin America, in countries such as Argentina and Colombia, in Asia in countries such as Uzbekistan, and in the Middle East, in nations like Egypt. There are notable differences among countries from these regions. They have very different histories, languages, and cultures. What they all share in common is extractive institutions. In all these cases the basis of these institutions is an elite who design economic institutions on order to enrich themselves and perpetuate their power at the expense of the vast majority of people. The different histories and social structures of the countries lead to the differences in the nature of the elites and in the details of the extractive institutions. But the reason why these extractives institutions persist is always related to the vicious circle, and the implications of these institutions in terms of impoverishing their citizens are similar, even if their intensity differs. In Zimbabwe, for example, the elite comprise Robert Mugabe. In North Korea, they are the Kim Jong II and the Communist Party. In Uzbekistan is President Islam Karimov and his reinvented Soviet Union-era cronies. Colombia has had a long history of elections, which emerged historically as a method for sharing power between the Liberal and Conservative parties. Not only is the nature of elites different, but their numbers are. In Uzbekistan, Karimov could hijack the remnants of the Soviet state, which gave him a strong apparatus to suppress and murder altenative elites. In Colombia, the lack of authority of the central state in parts of the country has naturally lead to more fragmented elites, in fact, so much that they sometimes murder one another. In Egypt, the situation was similar under the avowedly military regime created by Colonel Nasser after 1952. Botswana, China, and the U.S. South just like the Glorious Revolution in England, the French Revolution, and the Meiji restoration in Japan, are vivid illustrations that history is not destiny. Despite the vicious circle, extractive institutions can be replaced by inclusive ones. But it is neither automatic nor easy. A confluence of factors, in particular a critical juncture coupled with a broad coalition of those pushing for reform or other propitious existing institutions, is often necessary for a nation to make strides towards more inclusive institutions. In addition, some luck is key, because history always unfolds in a contingent way. There are huge differences in living standards around the world. Even the poorest citizens of the U.S. have income and access to health care, education, public services, and economic and social opportunities that are far superior to those available to the vast mass of people living in sub-Saharan Africa, South Asia and Central America. To answer, in fact, even to reason about, these questions, we need a theory of why some nations are prosperous while others fail and are poor. This theory needs to delineate both the factors that create and retard prosperity and their historical origins. This book has proposed such a theory. Any complex social phenomenon, such as the origins of the different economic and political trajectories of hundreds of polities around the world, likely has a multitude of causes, making most social scientists shun monocausal, simple. and broadly applicable theories and instead seek different explanations for seeminglysimilar outcomes emerging in different times and areas. a successful theory, then does not faithfully reproduce details, but provides a useful and empirically well-grounded explanation for a range of processes while also clarifying the main forces at work. Our theory has attempted to acieve this by operating on two levels. The first is the distinction between extractive and inclusive economic and political institutions. The second is our explanation for why inclusive institutions emerged in some parts of the world and not in others. While the first level of our theory is about an institutional interpretation of history, the second level is about how history has shaped institutionsal trajectories of nations. Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive political institutions. But neither the vicious nor the virtuous circle is absolute. In fact, some nations live under inclusive institutions today because, though extractive institutions have been the norm in history, some societies have been able to break the mold and transition toward inclusive institutions. History is key, since it is historical processes that via institutional drift, create the differences that may become consequential during critical junctures. Critical junctures themselves are historical turning points. And the vicious and virtuous circles imply that we have to study history to understand the nature of institutional differences that have been historically structured. Yet our theory does not imply historical determinism, or any other kind of determinism. Naturally, the predictive power of a theory where both small differences and contingency play key roles will be limited. Few would have predicted that the major breakthrough toward inclusive institutions would happen in Britain. The historical account we have presented so far indicates that any approach based on historical determinism, based on geography, culture, or even other historical factors is inadequate. Nations that have achieved almost no political centralization, are unlikely either to achieve growth under extractive political institutions or to make major changes toward inclusive institutions. Instead, nations likely to grow over the next several decades are those that have attained some degree of political centralization. In Latin America, it includes Brazil, Chile and Mexico, which have not only achieved political centralization but also made significant strides toward political pluralism. What can be done to kick-start or perhaps just facilitate the process of empowerment and thus the development of inclusive political institutions? The honest answer, of course is that there is no recipe for building such institutions. Naturally there are some obvious factors that would make the process of empowerment more likely to get off the ground. These would include the presence of some degree of centralized order; some preexisting political institutions that introduce a modicum of pluralism; and the presence of civil society institutions that can coordinate the demands of the population. But many of these factors are historically predetermined and change only slowly. A trasformative role in the process of empowerment is the media. Empowerment of society at large is difficult to coordinate and maintain without widespread information about whether there are economic and political abuses by those in power. The media can also play a key role in channeling the empowerment of a broad segment of society into more durable political reforms. Pamphlets and books informing and galvanizing people played an important role during the Glorious Revolution in England, the French Revolution, and the march toward democracy in 19th century Britain.Similarly, media particularly new forms based on advances in ICT, such as Web blogs, anonymous chats, Facebook, and Twitter, played a central role in the Arab Spring. Authoritarian regimes are often aware of the importance of a free media, and do their best to fight it. But of course a free media and new communication tech can help only at the margins. Their help will translate into meaningful change only when a broad segment of society mobilizes and organizes in order to effect political change, and does so not for sectarian reasons or to take control of extractive institutions, but to transform extractive institutions into more inclusive ones. Whether such a process will get under way and open the door to further empowerment, and ultimately to durable political reform, will depend, as we have seen in many differences instance, on many small differences that matter and on the very contingent path of history.