why nations-fail j-robinson

Why Nations Fail: The Origins of Power, Prosperity andPoverty

CDE Conference 2012, Williams College, September 27, 2012

James A Robinson (with Daron Acemoglu)

Harvard

September 27, 2012

Acemoglu Robinson (Harvard) Why Nations Fail September 27, 2012 1 / 28

Introduction

The Lay of the Land

Figure: The evolution of average GDP per capita in Western O¤shoots, WesternEurope, Latin America, Asia and Africa, 1000-2000.Acemoglu Robinson (Harvard) Why Nations Fail September 27, 2012 2 / 28

The Beginning

The Beginning� Latin America

Juan Díaz de Solís explores Río de la Plata (�River of Silver�) in 1516,and Pedro de Mendoza founds Buenos Aires in 1534.

But Solís and de Mendoza unable to enslave and put to work thehunter gatherer Indians of the area, Charrúas and the Querandí.Starving Spaniards soon left the area.

In 1537, Juan de Ayolas found the sedentary and more densely settledGuaraní up the Paraná river, in Paraguay. The Spaniards couldsuccessfully take over the Guaraní hierarchy, enslave them and putthem to work to produce food for them.

A very similar pattern to the colonization of the Aztecs and the Incas.


The Beginning

The Beginning� United States

Colonization attempts of Virginia Company in Jamestown in early17th century, attempting to re-create an authoritarian, �extractive�regime:

�No man or woman shall run away from the colony to theIndians, upon pain of death.Anyone who robs a garden, public or private, or a vineyard, or

who steals ears of corn shall be punished with death.No member of the colony will sell or give any commodity of

this country to a captain, mariner, master or sailor to transportout of the colony, for his own private uses, upon pain of death.�[from the laws passed by Sir Thomas Gates and Sir ThomasDale].

But the Company was unsuccessful� it could not force the Englishsettlers into gang labor and low wages.


The Beginning

The Beginning� United States (continued)

The Company switched to the �headright system�giving all settlers 50acres of land and then shortly thereafter also political rights, in theform of it General Assembly in 1619.

Similar events unfolded in Pennsylvania, Maryland and the Carolinas.

The chain of events that ultimately leading to the Declaration ofIndependence and the U.S. Constitution.

The di¤erences in the ways Latin America and North America wereorganized historically explain the di¤erences in the ways they areorganized today and their di¤erent levels of prosperity.


The Beginning

Legacy of Colonial Times Today

E¤ects today of the Mita the largest system of forced labor in colonialLatin America (from Dell (2010) �Persistent E¤ects of Peru�s MiningMita�)


The Beginning

Making Sense of the Divergence

While both culture (religion, attitudes, values) and geography(climate, topography, disease environments etc.) are important forthe ability of humans to form well functioning societies, they are notthe �main� source of this divergence.

Much of Latin America likely richer than North America as late asmid-18th century.Divergence due to the ability of the United States, just like Britain, totake advantage of new economic opportunities.

An �ignorance hypothesis� also unable to explain the logic of socialarrangements leading to relative poverty� Cortes, Pizarro and Ayolasdid not set up forced labor and repressive regimes because they were�ignorant�about their implications.Instead, central role of �institutions�broadly de�ned as the rules thatgovern economic and political behavior.Key questions: historical roots of institutional di¤erences and thelogic of institutions that do not unleash growth.


Main Concepts Inclusive and Extractive Institutions

Towards a Theory of Institutions

Extractive economic institutions: Lack of law and order. Insecureproperty rights; entry barriers and regulations preventing functioningof markets and creating a nonlevel playing �eld.Extractive political institutions� in the limit �absolutism�:Political institutions concentrating power in the hands of a few,without constraints, checks and balances or �rule of law�.Inclusive economic institutions: Secure property rights, law andorder, markets and state support (public services and regulation) formarkets; open to relatively free entry of new businesses; upholdcontracts; access to education and opportunity for the great majorityof citizens.Inclusive political institutions: Political institutions allowing broadparticipation� pluralism� and placing constraints and checks onpoliticians; rule of law (closely related to pluralism).

But also some degree of political centralization for the states to be ableto e¤ectively enforce law and order.



Synergies

Economic InstitutionsInclusive Extractive

Political Inclusive �#Institutions Extractive "�! �



Growth under Inclusive Institutions

Inclusive economic and political institutions (or inclusive institutionsfor short) create powerful forces towards economic growth by:

encouraging investment (because of well-enforced property rights)harnessing the power of markets (better allocation of resources, entryof more e¢ cient �rms, ability to �nance for starting businesses etc.)generating broad-based participation (education, again free entry, andbroad-based property rights).

Key aspect of growth under inclusive institutions: investment in newtechnology and creative destruction.Central question: why are extractive institutions so prevalentthroughout history and even today?


Main Concepts Labor Coercion

An Example: Labor Coercion

�In the context of universal history, free labor, wage labor, is thepeculiar institution�� Moses I. Finley

In West Africa, in 1820 the American Colonization Society (ACS)set-up a home for freed and repatriated African slaves in what is nowLiberia. Their descendents formed the Americo-Liberians whodominated the country until 1980.

About 3-5% of the population.

Extractive economic institutions were set up to extract resources forthe bene�t of the Americo-Liberians and to consolidate their politicalcontrol.

In the 1960s �tribal peoples�were still subject to forced labor on publicworks and rubber plantations (1/4 of the labor force in early 1960s).


Source: Dalton, George (1965) “History, Politics and Economic Development in Liberia,”Journal of Economic History, 25, 569-591.

How large were total wage payments in the Liberian Economy?

Source: Dalton, George (1965) “History, Politics and Economic Development in Liberia,”Journal of Economic History, 25, 569-591.

Wages as a Share of National Income? The ‘Stylized Fact’is that wages are 2/3 of National Income.

The Liberian Facts:1950 = 11.5/58.1=19.8%1960 = 46.9/172.8=27.1%

Social Relations and Political appointees of President Tubman in

1960Inspector bof Counties

c c bb

c

b c cDirectorof Budget b f

Director,Nat. Pub. Gen. Conf.Health Sv. of Labor

bb

Ambassadorto Italy

b b bSenatorG.C.M;Co. f

b b Ambassador b

of Guinea b

bs

b

Pres., Bank b bof Liberia

Key: b = brother; f = father; c = cousin; s = sister; w = wife

Secretaryof Commerce

c

b

Director,Bur. Of

Nat. Res.

VICE-PRESIDENTOF LIBERIA

Senator,Monts. Co.

to UARAmbsassador Undersec.

of State

Commissionerof Immigration

Ambassadorto Germany

PRESIDENT OF LIBERIA

SECRETARYOF TREASURY

to USA

Ambassadorto UK

President,

w

Ambassador

Ambassadorto UN

Commissioner of Communications

Secretaryof State

w

w

w

w

w

w

w

w w

w

w

Source: Clower

et al. (1966, Chart 1, p. 13)

Main Concepts Logic of Extractive Institutions

The Logic of Extractive Institutions

Main thesis is that growth is much more likely under inclusiveinstitutions than extractive institutions.

Growth, and inclusive institutions that will support it, will create bothwinners and losers. Thus there is a logic supporting extractiveinstitutions and stagnation:

economic losers: those who will lose their incomes, for example theirmonopolies, because of changes in institutions or introduction of newtechnologiespolitical losers: those who will lose their politically privileged position,their unconstrained monopoly of power, because of growth and itssupporting institutions� fear of creative destruction.both are important in practice, but particularly political losers are amajor barrier against the emergence of inclusive institutions andeconomic growth.


Institutional Change Small Di¤erences and Critical Junctures

Towards a Theory of Institutional Change

As a consequence of the distributional consequences of institutionscon�ict pervasive in society.In the context of di¤erential institutional drift ! small but notabledi¤erences in institutions across nationsSmall di¤erences that matter when critical junctures arise -con�uence of factors which can undermine the status quo

institutionst �!drift

institutionst+1 �! % institutional

" & divergencecritical juncture

But outcomes not historically determined, partly contingent.The changes that happen as a result of this interaction then becomethe background institutional di¤erences upon which new criticaljunctures act.



Transition to Inclusive Institutions

Extractive institutions have been the norm in world history.

Where do inclusive institutions come from?

Earlier moves towards inclusive institutions resulting from con�ict andinstitutional drift� Roman Republic, Venice, but ultimately reversed.

Crucial turning point: the Glorious Revolution in England in 1688.

The Glorious Revolution brought much more inclusive, pluralisticpolitical institutions which then led to a transition towards much moreinclusive economic institutions.

This created the conditions which led to the Industrial Revolution.Growth in the 19th century and dissemination of industry wereconditioned by interactions between initial institutional di¤erencesand the critical junctures created by political events and the IndustrialRevolution itself.



The Emergence of Inclusive Institutions in Britain

Driven by the interaction of initial institutions and critical junctures:

Initial institutional drift: Britain was the bene�ciary of a long historyof gradual institutional change from the Magna Carta of 1215 onwards,through the creation of a monopoly of violence by Henry VII after1485, nascent state under Henry VIII, Civil War of the 1640s.Critical juncture: Development of the Atlantic economy after 1492led to the emergence of a broad and powerful coalition in society infavor of reforming political institutions and removing absolutism.Owing to the context created by the initial institutional drift, thiscoalition triumphed in 1688.Small di¤erence: Initial institutions in Spain somewhat di¤erent,especially in allowing the crown to monopolize colonization andAtlantic trade ! critical junctures leading to greater wealth andpolitical power of the monarchy.



The Emergence of World Inequality

The Industrial Revolution disseminated very unevenly becausedi¤erent parts of the world have very di¤erent institutions:

1 European settler colonies in North America and Australasia haddeveloped inclusive institutions by a di¤erent route (but stillcon�ictual).

2 Western European institutions diverged from Britain in the 17thCentury but were not too di¤erent where it mattered.

3 Some East Asian economies, like Japan or South Korea were able toendogenously transition to inclusive institutions.

4 Many nations (e.g., Eastern Europe, Ottoman Empire) had longexisting extractive institutions.

5 Others had extractive institutions imposed upon them by Europeancolonial powers (creation of �Dual economies�in Southern Africa).



Why Nations Fail Today

Extractive institutions.

These come in di¤erent varieties.



Labor Coercion in Uzbekistan

On September 6 2006, schools in Uzbekistan were emptied of 2.7million children. A mother of two explains:

�At the beginning of each school year, approximately at thebeginning of September, the classes in school are suspended, andinstead of classes children are sent to the cotton harvest.Nobody asks for the consent of parents. They don�t haveweekend holidays [during the harvesting season]. If a child is forany reason left at home, his teacher or class curator comes overand denounces the parents. They assign a plan to each child,from 20 to 60 kg per day depending on the child�s age.

Why? Uzbekistan under the corrupt regime of Islam Karimov.Cotton farmers are forced to sell at very low prices. Lack of incentivesand running down of machinery. Use of forced labor as a substitutefor incentives for farmers.


The Pact of Sante Fé de Ralito, 23 July 2001

Don Berna Salvatore Mancuso

Breaking the Mold

Breaking the Mold

History is not destiny.

E¤ective reforms towards inclusive institutions possible if the Iron Lawof Oligarchy can be overcome - the role of the broad coalition.But it often necessitates a minor or major political revolution.

Two examples:1 End of Southern equilibrium in the United States2 Brazil


Breaking the Mold

�Political Revolution� in the US South


Breaking the Mold

Formation of a Broad Coalition in Brazil

As Fernando Henrique Cardoso argued in 1973, democracy could onlybe re-created in Brazil by

�a reactivation of civil society ... the professional associations,the trade unions, the churches, the student organizations, thestudy groups and the debating circles, the social movements�

... in other words a broad coalition.


The Role of Development Advice, Aid and InternationalInstitutions

Basic Development Policy Issues

In this framework poor countries are not poor because theirpolicymakers or citizens are uninformed about what good policies orinstitutions are. They are poor because those who exercise politicalpower choose to organize society in ways that robs the vast mass ofpeople of opportunities or incentives.

The basic message is that to generate economic change politicalchange is necessary (think US South, Brazil, or Arab Spring).

This is something which is hard to achieve from the outside and evento intervene to in�uence the balance of power in society risks massiveunintended consequences and requires a lot of information about thecontext (not to mention whether or not it is ethnical).

There are some false options:



False Option #1The Irresistible Charm of Authoritarian Growth

Though growth is much more likely under inclusive institutions, it isstill possible under extractive institutions.

Why? ! Generate output and resources to extract.

Two types of growth under extractive political institutions:1 extractive economic institutions allocating resources to highproductivity activities controlled by the elites (e.g., Barbados, SovietUnion)

2 when relatively secure in their position, the elites may wish to allow theemergence of relatively inclusive economic institutions under theircontrol (e.g., South Korea under General Park, China today).

But big di¤erence from growth under inclusive institutions: nocreative destruction and dynamics very di¤erent. Consequently, eventhough growth is possible under extractive institutions, this will notbe sustained growth.


Paul Samuelson’s forcastFor US and USSR relative economic growthin the 1961 edition of his textbook.

The 1967 Version

The 1970 VersionOvertaking delayed!


False Option #2Good Economic Policies and Economic Growth will Improve Institutions

Banerjee and Du�o in their book Poor Economics (2011, p. 261)pose the question

�Can good policies be a �rst step to good politics?�

The �modernization hypothesis�suggested just that but the empiricalevidence is strongly against this speci�c idea.

There is no theorem that good policies are bad politics (though thereare some models in which this is true - for example the book ofNorth, Wallis and Weingast) but a fallacy to think that policies whichare good from an economic point of view move politics in a gooddirection.



False Option #3Engineering Prosperity

Development economics is currently dominated by a paradigm whichsays

1 Policymakers are basically well intentioned.2 Both policymakers and academics are ignorant on what the bestpolicies are.

3 Best policies are context speci�c and we need real causal (scienti�c)evidence (from randomized evaluations) on which policies work inwhich context.

This approach is tantamount to giving up on explaining empiricalpatterns of comparative development (though it generates a lot ofwork and jobs for economists) - which perhaps is all we can do.



Is Foreign Aid a False Option?

According to this framework foreign aid in itself will not change the�political equilibrium�of a society and thus cannot solve the realproblem of development.

However, the evidence does not suggest, contrary to what manyclaim, that aid is itself the major cause of poor institutions andpolicies in poor countries - political and institutional roots lie muchdeeper.

Aid is a response to poverty, not the cause.

Aid has many positive impacts on people�s welfare and theinfrastructure of poor countries which is good.



The Partners in Health Model?

PIH (founding members include Paul Farmer and Jim Kim) have aninteresting, if as yet unarticulated political model.

They built hospitals and health care facilities in poor countries withastounding success. But politicians want to control access to scarceresources like health care.

How do they solve this problem and keep their hospitalsde-politicized?

My impression is the main way is to work �under the radar screen�,building hospitals not in Port-au-Prince or Kigali, but in Mirebalais orButaro.

Can we �nd de-politicized spaces?



A Suggestion in the Spirit of the BookEmpowerment

When I was a boy, women in the UK and elsewhere in the world brokedown a lot of gender discrimination with the concept of�empowerment�.

Empowerment redistributed power (or rights?) in ways which changedinstitutions (we know discrimination against women is bad for manydevelopment outcomes).

Think of this in the context of public service provision: poor peopleare the ultimate bene�ciaries, if you make them more powerful theyhave the right incentives to demand the provision of services.

The World Bank�s Community Driven Development program is in thisspirit but it is a �one size �ts all�model insu¢ ciently informed aboutthe political problems which generate disempowerment.


why nations-fail j-robinson

Economy & Finance