Thursday 3 October 2013

A book review

Why Nations Fail

By Daron Acemoglu & James A. Robinson

I
Economics not long ago was at risk of becoming obscure and irrelevant. The perfectly informed and rational human agents of mainstream theory were nowhere to be found in the bubbles, financial crises and economic upheavals of recent times. All too often, Western policy-makers and market practitioners have been stunned when sensible economic prescriptions are blindsided by politics. 
Emerging from the consequent angst in academic circles is an approach that broadens the forces and influences seen to shape economic outcomes. Nobel-prize winner Daniel Kahneman's Thinking, Fast and Slow marries insights from the field of social psychology and neuroscience to economic behaviour. 
Blending prehistory, geography and anthropology, The Origins of Political Order by Francis Fukuyama's distills three ingredients for a successful and enduring nation: the rule of law, a strong state and accountability.
Older but in keeping is Albert O. Hirschman's classic text Exit, Voice, and Loyalty which contrasts the choices citizens make when trapped in failing organizations and states. 'Exit' is voting with your feet, taking your business elsewhere. Voice' is staying put and fighting for reform from within.

II
Daron Acemoglu & James A. Robinson, professors at MIT and Harvard University respectively, make a compelling addition to this trend in contemporary economics. Why Nations Fail draws widely across the globe and vividly into history to answer some big questions. Why do some societies prosper while others persist in poverty? Why does the global map of the richest and poorest countries look remarkably the same today as fifty, hundred and two hundred years ago with sub-Saharan Africa and Central America much poorer than Western Europe, North America, Australia and New Zealand. Without oil, the Middle East countries are also all poor. 
Traditional development economics (the 'dual economy' thesis, modernization theory, 'market failures') ignore politics. Therein lies their failure for it is politics, argue the authors, that drive everything. Get the politics right and all else follows. 
And what is right' are 'inclusive' institutions which incentivize citizens and create virtuous circles of innovation, expansion and widely-held wealth. Elements vital to keeping the virtuous circle going are pluralism where many, varied groups exist to check each other's power, laws applied equally, universal education, a free media to inform and empower, secure property and patent rights that encourage investment and open markets free of monopolies and progressive taxes. 
However, where 'extractive' institutions prevail allowing a narrow elite to monopolise economic gains, technological advances are blocked, productivity deteriorates and a vicious circle of enduring backwardness sets in. There is great and easy profit to be made merely by controlling power, expropriating the assets of others and setting up monopolies. Hence, the hostility to new technologies whose impact is both creative and destructive. Favouring new skills and economic groupings, innovation invariably undermines the power and privileges of the old, vested elites. 
However, inclusive institutions that adapt to allow ever broader sections of society to generate and share in the new wealth trigger a path of rising prosperity. On the other hand, extractive societies are ultimately unsustainable. Blocking newer, more efficient ways, old sources of wealth are rendered obsolete by more vibrant competition elsewhere. As the pie shrinks, infighting among elites for control intensifies. 
III
Acemoglu & Robinson's central thesis is that these institutional differences become crucially important at critical junctures, major events that disrupt the existing balance of power in a nation. The Black Death of 1346, expansion of world trade after 1600, the Industrial Revolution in the late eighteenth century and European colonization were among such defining moments. 
Hence why did the Industrial Revolution take off first in England followed by its settler colonies (the US, Canada, Australia), France and Spain but fail elsewhere? The authors trace the roots to the bubonic plague in 1346 which transformed and split Europe. Halved in numbers, the peasantry in Western Europe gained in bargaining power. Not so in Eastern Europe. Serfdom hardened to leave the medieval feudal order intact and the masses destitute. 
In England however the masses were further empowered by Glorious Revolution of 1688. Power shifted from the monarchy to Parliament which acted to open economic access to a broad cross section of society. England rationalized property rights, enacted patents for ideas, protected law & order and abolished monopolies and arbitrary taxation. 
Thus by the 18th century, England had already developed the world's first set of inclusive political and economic institutions. This plurality of interests and freedom under a growing market economy allowed entrepreneurs and innovators to emerge and commercialise the scientific knowledge that had accumulated in Europe over several centuries. The impact was dramatic. The Industrial Revolution improved every aspect of the English economy: transportation, metallurgy, steam power and mechanization of textile production. The French Revolution in 1789 then led the institutions of Western Europe to converge with those of England.
In contrast, absolutist rule continued in the nineteenth century in Eastern Europe, the Ottoman empire, Africa and most of Asia blocking the spread of industrialization. China was a major naval power centuries before the Europeans. But by the fifteenth century, the Ming emperors had abandoned global voyages fearing that trade and new ideas would threaten their rule. Subsequently, independent cities, merchants and industrialization were non-existent in China for two centuries. Though never formally colonized, a weakened China was defeated in the Opium wars and forced into humiliating trade concessions by the European powers. 
Conditions were no less hospitable in India with society constrained under a rigid caste system, absolutist Moghul rule and the arrival of English colonial rule. In Southeast Asia, initial progress from a thriving spice trade reversed under the extractive plantations of the Dutch and English East India Companies. Only Japan played out differently in Asia. Like China, Tokugawa rule since 1600 was feudal, absolutist and banned international trade. However the arrival of the Americans in 1853 cemented opposition and led to a political revolution. The Meiji Restoration enabled more inclusive institutions and modernized Japan, laying the foundations for subsequent rapid growth. 
In the Americas, European colonization set the stage for divergence. In contrast to the inclusive institutions modelled after England that developed in the US and Canada, highly extractive ones emerged under the Spanish conquistadors on lands occupied by the once majestic Aztecs, Incas and Maya civilisations, forcing their living standards down to subsistence level. These institutions endure till today condemning the region to poverty. 
Africa was the part of the world least able to capitalize on the Industrial Revolution. Already lacking centralized states resulting in lawlessness and unstable borders (a continuing handicap shared with Afghanistan, Nepal and Haiti), the Atlantic slave trade decimated human and property rights and compounded Africa's backwardness. Ironically, while the discovery of the Americas helped England develop inclusive institutions by emboldening the merchants opposed to the Crown, it made Africa more extractive. lindependence, rather than creating a critical juncture to improve their institutions, has opened up a cycle of revolutions and radical movements that merely replace one tyranny with another (dubbed the ‘iron law of oligarchy’).
 With these vivid trajectories from the past five hundred years, the authors show how critical junctures served as a double edged sword in that how political institutions in various nations responded determined if they set off on a path of rising prosperity or poverty. Fascinatingly, small initial differences became more significant over time.
IV
Seeing institutions and incentives as the cause, Acemoglu & Robinson are dismissive of views that poor countries are poor because of their geography or culture, or because their leaders are ignorant. 
Witness the yawning gap between North and South Korea, identical twins in geography and culture but divided at the 38th parallel six decades ago to evolve under very contrasting political regimes. Or East and West Germany before the fall of the Berlin Wall in 1989. Perhaps the most controlled experiment is in the little-known town of Nogales. Divided by a mere fence, residents on the north, belonging to the United States, face lower crime, live longer and earn three times the south side, part of Mexico. 
Hence it is not Islam that keeps the Middle East poor but the extractive nature of Ottoman and European colonial rule bequeathed upon today's authoritarian regimes. Could European descent be at the root of success? Yet Argentina, more 'European' than the immigrant populations of the US and Australia, has fallen mightily from the richest ranks at the turn of the twentieth century. Meanwhile, Japan and Singapore, with miniscule European heritage, are now as prosperous as Western Europe. 
Western policy circles (the IMF, World Bank, aid agencies) also come in for criticism with their approach assuming that merely enlightening political rulers about sound economics will 'engineer' prosperity. The politically powerful make economic choices that enrich themselves at the expense of the majority because they can get away with it, not because they are ignorant. 
V
But history is not destiny. Crossing into the 20th century, there are striking examples of countries 'breaking the mold'. In the US South, the empowerment of black Americans through the civil rights movement coupled with intervention by federal institutions finally ended the domination of the southern white elites. In 1940, southern states were at half the average US national income. By 1990, the gap had vanished and in 2008, the nation elected its first black president. 
The rebirth of China is no less remarkable. Impoverished for three decades under Mao's disastrous policies of the Great Leap Forward and Cultural Revolution, China reversed course to embark on the most rapid growth in the world. It was Deng Xiaopeng's brilliant political coup that freed the way to introduce more inclusive market incentives in agriculture and industry, and allow foreign investment into selected cities. 
The common ingredient: political reform that seized the day to shape more inclusive economic institutions and incentives. While admittedly few, it is in these examples that the lessons of the book have their most appeal, offering a way forward to douse the fires burning in Egypt, Turkey and Brazil.

2 comments:

  1. Dear Tong, firstly I am sure u will become a happy grandpa soon. My PA try reach your PA many many times but we fail to meet u.

    ReplyDelete
  2. Sorry, first post not related to the topic. I believe u must know the Rothschild family. All the crap on this topic is created & controlled by them in a very orderly & cunning way. I am a market player n see the financial market is their playing field to control the whole systems... u can't fight them, join their move & soon u may able to change the world. Don't think too much, enjoy playing with your grandson or grand daughter. Cheers....

    ReplyDelete