Saturday, 11 May 2013

"Culture" doesn't exist (and some more clarifications on institutions...)

Hi David,

Thanks for the feedback, and your usual gentle but firm style!  I wanted to counter on a few points (I don't think we'll end up disagreeing much, but there do seem to some important subtleties that are worth noting).

1.  You are wrong when you state in your reply, without any qualifications, that "investing money in industry clusters without taking on monopoly regulation is not the most effective way of encouraging innovation".  The failure to put any qualifiers to that (in the same way that you make a sweeping "How Governments Actively Discourage Innovation" statement in your original post - no contextual limiters, just a sweeping blanket statement) is the mistake.

There are plenty of examples from economic history of just that approach being highly successful.  As it happens, here's a very topical article on Brazil from Forbes - note the fifth paragraph that shows just such a constructive 'national champion' as being highly successful (and spawning an innovation hub).  The S Korean chaebols of Samsung and LG are similar phenomenally successful examples.  From heavy industry to consumer durables to sophisticated electronics - with heavy R&D along the way.

The key point in these examples, of course, is that the 'national champions' (which were essentially national monopolies or oligopolies that were created by the respective governments) were still having to compete in international export markets.  So they had to innovate.  This seems to be the difference w Mexico, with the national monopolists not just being protected domestically, but also not being forced to compete in export markets?

So if the point you are trying to make is that competition is important for innovation, then absolutely.  But that does not necessarily mean that competition has to be domestic.  Context - both time & space - is key.  The policies needed in country A may be very different from country B, with one needing national champions and the other needing anti-trust.   Equally the policies needed in country A at time T1 (when perhaps national champions are needed) may be very different from a later time T2 (when perhaps anti-trust breakups are needed).

Pragmatism is vital - see Deng's classic quote here.  And making blanket statements, without qualifiers, is something that I'm afraid I have to call out (very unlike you, in your defence!).

2. This then leads to the question of what is the nature of, and motivation behind, govt policy choices in any country at any time.  My point is that institutional analysis is the key holistic insight here - an insight that leads to my dismissal of "culture".

But before we get to that, I think it is worth clarifying a misundertanding.  You seem to be seeing institutions as something mostly procedural or regulatory (eg, anti-corruption commissions, structured rules, legal rights around property or marriage, or things that can be "accompanied by complementary initiatives in the media and education").  In the normal sense of "institution" in day to day language, that's probably right.

But in new institutional economics, these are simply sub-sets of "institutions", with institutions actually being much broader than that.  In particular, you'll see the references in that hyperlink to not just social norms, but also to governance, ideological values, gained control, asymmetric information, bargaining power and so on.

This may seem just like semantics but its not.  Govts do not control or create institutions - but are in fact themselves a reflection of, and created by, institutions (in the economics sense).  So you cannot separate those, and criticise one without criticising the other.  And equally, if there are shortcomings in one, that will typically be driven by shortcomings in the other.  This is a dynamic, endogenous relationship.

Your critique of 1980s/90s LatAm with import substitution policies that were not accompanied by skills, education or deregulation is a perfect example of this.  All of those seem to be consistent with LatAm having extractive institutions in that period.  The elites benefited from import substitution (since they controlled the national champions) and of course also had no incentives (or pressure) to invest in the skills, education or opportunity-creation of the non-elites.  So actually the fact that that happened is not surprising at all.

The real question is how and why did LatAm institutions change to become more inclusive.  I'm not an expert on the region, but I daresay the political struggle and mobilisation of the marginalised or underprivileged was the key factor (a la Lula, Morales, Chavez et al).  I'd doubt that there was any magical, benevolent culture shift in the region.  I'd wager that it was political competition that either led to outright regime change, or progressively more inclusive politicoeconomic bargaining by incumbent elites.

(Yes, I'm aware that Brazil, Venezuela, Ecuador have all gone different ways.  Context is indeed key as flagged above - there is no deterministic blanket path.  Even Lula I believe started his first administration as a classic radical, but was foresighted enough to know he had to be pragmatic).

3.  So when you extol the importance of norms, behaviours and values, I couldn't agree with you more.  But those are part of institutions!  They are not something alien or parallel (or exogenous) to institutions.  Media and education are not things that accompany institutions, they are examples of institutions.

This may seem like generalising institutions to such an all-encompassing level that they are no longer useful for analytical purposes.  Not so, because what such a lens of "institutions" forces us to look at is not just the formal rules, but also the underlying norms, behaviours and value systems.  But not just stop there, but also to look at bargaining power, information asymmetry etc.  And not just stop there, but to look at the fact that these shape each other endogenously and reflexively - and that therefore the whole thing becomes not just dynamic but also the epitome of a complex system.

This forcing process to look at all these factors is vital (and is the real value-add of such an institutional approach).  It is also why I argue that "Culture" does not exist.  And that arguments based on "Culture" are prescriptive, ascriptive and are rhetorical camouflage (devices of distraction even).

4.  So now we come to the point that you seem to have felt most strongly.  And actually your example proves my point :) ...

Let me ask you, is there such a thing as "Mexican" culture?  I know much less about the region than you, but do the peasants in Chiapas share the same culture as the landowners and industrialists or the hipsters and techies or the narcos?

Certainly, if we look at other parts of the world, the values, beliefs, worldviews, norms (however you want to define "Culture") vary hugely within countries.  Not many folks would claim that the Northern states of India have the same culture as the North-Eastern or Southern states.  Or that the adivasis have the same culture as the landowners, or the landowners the same culture as the city-dwellers.  Or that the Muslims have the same culture as the Hindus or the Christians.  Or that even within the same state or city, that 20-something dalits have the same culture as 20-something upper-caste Hindus.

Or that in Nigeria, for example, that the northern Muslims have the same culture as the southern Christians.  Or that the Igbo have the same culture as the Yoruba or Hausa.  Or that in Kenya (very topical), that the Kikuyu have the same culture as the Kalenjin or Luo.  Or that in Uganda that the Karamojong have the same culture as the Kampala-dwellers. Or that in South Africa, the English have the same culture as the Afrikaners, and either of them have the same culture as rural black people (whether Zulu, Xhosa or other).

You get my point.  Where or what is "Culture" in these countries?  "Culture" as a proposed explanatory variable omits a crucial dimension: power.

I believe that societies are composed of hugely diverse groups.  These groups have different world-views, norms, beliefs etc.  These groups form coalitions and rivalries in order to advance their own well-being.  These coalitions and rivalries are never static or linear - they will be nuanced, Machiavellian, opportunistic (as well as more strategically motivated through generations of ingrained dogma).  Power is contested for, achieved, shared, lost, rebalanced, renegotiated.  It is frankly a perpetual competitive process.

This is what institutional analysis shows us, and forces us to confront.  You cannot wave a magic wand of "Culture" over this.  You can use "Culture" as a lens to try and taxonomise the component norms, beliefs and views of a particular sub-group.  But the bargaining, coalition and rivalrous behaviour is fundamentally a political one - not a cultural one.

5.  As a coda, you're absolutely right around media and education.  In the long-run, persuasion is more effective (and efficient) than coercion.  Why else do the Jesuits say this?  And why else is education (and the lack thereof) so close to the elites' hearts?  And curricular content (and subject matter prioritisation) so fought over?  And as Freire beautifully wrote, pedagogy also so skewed?

But let's also be clear.  When you correctly say that education is needed, and that cultural campaigns are needed - implicit in that is that these should be aimed at delivering or enhancing the views and beliefs that you share.  (I'm not picking on you - the same is true of anyone who makes this point: it's human nature!).

Gay marriage is a perfect example - "marriage" is a legal institution that is only happening because societally, norms around homosexuality have (thankfully) changed (ie, the institutions around sexual orientation changed to pave the way for an eventual legal reflection of that).  The opposite is also the case with, for example, racism.  There are plenty of laws that prohibit racism, but of course it is institutionalised into society so that it still happens (see the Lawrence enquiry in the UK, or the topical observations by Charles Ramsey in Cleveland).

So when "Culture" is used, it is an ascriptive explanation.  Let's be clear - culture is never neutral, it seeks to convert and evangelise and differentiate (many would argue that is its evolutionary point!).  And indeed it is the most potent tool and device because once it works, people think, behave, act (and elect) on the basis of identity and self-identification.  I would even go as far as saying (to be wilfully provocative) that "Culture" is an insidious framing because it makes those who don't share it a more alien "other".

Anyway, returning to our argument of how best to think about how societies work, "Culture" is not a neutral explanatory framework but a competitive tool, device and objective.

That is why I argue that "Culture" doesn't exist as an explanatory framework.  Societies are made out of sub-groups (themselves often in flux) which are in a constant competitive process of coalitions and rivalries.  Institutional analysis that forces us to look holistically at all these factors is by far the better explanatory framework than "Culture".

Monday, 6 May 2013

Clarifications on a review of Why Nations Fail

Hi David,

Thanks for this.  Always good to see people being blown away by "institutions" (I haven't read the book, mostly because I have read many of the underlying econometric papers - some of which are now 10+ yrs old: those are mind-blowing pieces of analysis - a Nobel is a shoo-in in the future).  Anyway, I did want to just make a few observations sparked by some of what you wrote:

1.  Govts are themselves creatures of the institutions (ie, norms) that prevail in a society.  So they can be extractive or inclusive.  When you say "how govts actively discourage innovation", well they can also actively encourage innovation & growth.  The Israeli govt's catalysed its innovative VC sector with some excellent & subtle intervention.  Many have pointed out that much of US tech is grounded in govt support.  S Korea is another example.  Germany's post-WW2 wirtschaftswunder is another example of canny govt actions.

So, I would query painting "govt" as an automatic bogeyman.  Whether it is or isn't is actually driven by the institutions of the country - you can't blame (or praise) one without doing the same to the other.

2.  Your dismissal of "top-down economic development" in favour of a pastoral paean to "bottom-up entrepreneurial innovation" is misguided (and if A&R actually also say that so starkly, and without acknowledging the points that follow, then so are they).  Entrepreneurial innovation does not (indeed cannot) happen in a vacuum.  A govt can play a subtle guiding hand which is still very much top-down and state-guided - and incredibly effective.  Perhaps you mean command-and-control economies, but then say that (command-and-control is vehemently not the same as top-down - aka guided - economic policy).

See the national examples cited in the first point above for where nuanced top-down economic policy choices have had profound, long-lasting impact.  And see the consequences of the Washington Consensus driven structural adjustment programs imposed on Africa for a missing-state counterfactual.  (Btw, you dismiss China's achievements too quickly - never in the history of the world have so many people had such tremendous increases in wellbeing as in the 20-25 years from 1978 onwards).

3.  Similarly, I have to dispute your statement that "poor countries support old monopolies" and that "top-down economic development...will eventually run out of steam when old sectors can no longer compete with cheaper innovations from abroad".

This is not an inevitable outcome as you imply.  Whether it happens or not depends upon the nature of the institutions in a country.  Wealthy countries are as prone to such capture (aka crony capitalism) - see Wall St's capture of the US (which even Simon Johnson, a former IMF chief economist and co-author with A&R of some of their seminal papers, has called out).

I will also point you towards S Korea, which after WW2 was an agrarian economy (actually lagging behind many African countries).  The country used state-directed capitalism to support national chaebols.  But the chaebols were required to earn foreign currency by competing effectively against their international rivals.  This is what kept them subsidised but sharp.  S Korea's progression from agrarian to shipbuilding to semiconductors to Samsung-about-to-eat-Apple's-lunch, w Seoul the most digitised city on the planet, shows this not to have been a flash in the pan?  And just in case there's anything magical about S Korea (those arguments about culture...see below), look across to Taiwan which similarly has resulted in companies like HTC and Acer.

It is worth noting that with S Korea, Taiwan, Israel, post-WW2 Germany: all these countries were facing existential threats.  As did the cold war US.  Perhaps that is the ultimate competitive impulse that keeps elites, and institutions, inclusive.  Undisputed hegemony is what paves the way to extractive institutions.

I'll also, if I may, cite another industry that might be regionally relevant for you - aerospace.  Embraer is now a globally competitive company: that has had strategic Brazilian govt support, including subsidies, throughout (granted that command-and-control almost killed it - but govt support and subsidies have continued even when managerial autonomy was increased, in a trend similar to the S Korean one of having to compete against international rivals).  Bombardier from Canada - similar govt support.  Airbus?  Ditto.  Boeing?  Ditto.

In all these, you'll see that "established monopolies" with govt protection were still harnessed in a way that delivered powerful competitive growth to the national economy - growth that enforcing the support of domestic "disruptive entrepreneurs" would just not have delivered.

4.  I don't buy arguments about "culture".  Simply because culture can either go two ways.  It is either the social norms, beliefs and behaviours of people - which is what institutions (in the economics sense) are.  Or it becomes a prescriptive or deterministic argument.  Which is a dangerous slope towards the arguments used by colonialists and others of even more venal ilk.  I'll start giving credence for "culture" when someone can show me examples of culture that don't fit into either of those two alternatives.  You cannot differentiate behaviour or norms from institutions.

5.  Be careful about conflating A&R w Dambisa Moyo's arguments.  While they may well offer up a critique about some of the counter-productive possibilities about aid, they do not go as far as Moyo.  In Acemoglu's own words from a recent interview, "aid can neither save countries, nor condemn them to poverty".  

Moyo argues that aid outright condemns them to poverty, and in fact proposes a benevolent elite argument where she argues that democracy is a luxury poor countries should dispense with and instead rely on their business elites (entrepreneurs anyone?) to deliver economic growth that benefits all!  As if inclusive institutions are just the default setting in all incumbent business elites!  I won't get into a critique of her very weak (and often plain wrong) arguments - if you're interested, here's a good one by another Zambian economist.

6.  The point about critical junctures is that they involve existential threats to elites.  This is what forces them to broaden the political bargain with greater swathes of society - leading to more inclusive institutions.  What is needed is genuine intra-elite and inter-elite competition.  It is where this doesn't happen (or just pretends to happen) that extractive institutions start to emerge and ossify.

I think arguments about simply "influencing the next generation of elites" are well-intentioned but naive if they don't realise that elites are much more likely to change when they have to, not when they've been influenced.  Enlightened self-interest can be an effective catalyst of change, but more so when fear rather than greed is involved.  Greed-induced change is marginal at best, leading inevitably to a circulation of elites.  Fear-induced change will probably lead to that as well, but will take longer (having to tread the iron law of oligarchy).  Competition is what is needed - constant, unmanageable, dynamic and at times existential.

I hope these quibbles are taken in the helpful vein intended.  I'm always pleased when folks  realise the importance of institutions - it is eye-opening.  But equally its important to percolate this through and see the consequences for hackneyed arguments about govts, state-directed development, magic-entrepreneurialism.  As A&R say in that same recent interview (and as you'll see also coincidentally echoes Morozov's critiques of solutionism): "getting institutions right is not an engineering problem, it is a political problem".