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".


1 comment:

David Sasaki said...

Hi Vineet, thanks for engaging. First of all, I'd encourage you to read the book. It goes well beyond The Colonial Origins of Comparitive Development, which I also read when it was published. (Along with Fukuyama's The End of History and Huntington's Clash of Civilizations, it was all the rage when I was in college.)

To say that governments actively discourage innovation doesn't imply that they don't also actively encourage innovation. My argument in that section is that investing money in industry clusters without taking on monopoly regulation is not the most effective way of encouraging innovation.

I think you're impression that I'm painting government as "an automatic bogeyman" is probably because governments are best positioned to improve certain institutions such as regulation of monopolies and property rights. The pessimist says governments are failing, the optimist says that governments can do better. From our professional work you know that I am in no way "anti-government" and that, in fact, my concern is that the privatization of public services and public goods means those services reach fewer people and are not held to account.

I don't dismiss top-down economic development — the authors do. Again, you should read the book. I think that import substitution policy in Latin America was extremely effective in lifting millions out of poverty, but the lack of focus on skills training, education, monopoly regulation, and entrepreneurialism, led to the economic instability of the 80's and 90's. (Let's leave the long-term viability of China's economic and political model to a future conversation over drinks.)

I don't understand how thoughtful individuals like yourself wave a hand and dismiss "culture" in scare-quotes. There is nothing prescriptive and deterministic about culture … culture constantly changes. Institutions are more than norms, beliefs and behaviors. Institutions are structured rules and processes that are defined by politics. Culture is different. In its broadest sense, culture is everything we hand down beyond our genetic code. My use of the term, however, refers to the influence of education, media, social networks and history in how a society forms its worldview. There are cultural reasons why Mexicans, for example, do not support a privatized energy sector or political re-election that do not apply in other countries.

It is important to take into account the power and influence of culture in the development of institutions. The institution of gay marriage in the United States would not develop without a decades-long cultural campaign. I would caution you not to fetishize institutions as silver bullets to change norms and behaviors. New administrations are fond of creating new institutions (say, anti-corruption commissions) and then claiming the job done. Societies are complex, social change is a long process, and institutions must be accompanied by complementary initiatives in the media and education.