February 8, 2018
Dear Friends and Family,
This segment’s conclusions are derived by analyzing the failure of nations to grow. The central theme is that the initial political systems of most slow growing countries were extractive, meaning that the political power was vested in a single person or a small group of people – the King, Queen, dictator, or the elites. And that power structure would extract wealth produced in the country either by farming or extraction of natural resources, through taxation or confiscation keeping much of it for themselves and leaving little for the rest of the populace. The extractive political system would stay in place until some set of circumstances resulted in that extractive political system to fail, e.g., through revolution, economic collapse, benevolent elites assuming power, etc. Even so, that change alone would not result in a transformation to an inclusive political system, as the country would be in “the vicious circle” of extractive political institutions forging extractive economic institutions, which in turn create the basis for the persistence of extractive political institutions – a negative resistive cycle.
To achieve an inclusive political system, political centralization is needed with a stable rule of law, stable institutions and the desire for pluralism. Only then will supportive inclusive institutions be formed and sustained both economically and socially. So, the conclusions of the last segment’s success and failure in terms of what is required to break the cycle of poverty are very similar with this segment.
But the authors maintain there is one major difference. The success analysis concluded that democracy was not an imperative in the equation based on the recent success of China. The failure analysis of this segment also concludes that democracy was not an imperative to economic success, but to sustain that success the political system has to be inclusive (democratic) based on the recent failure of Russia. Further, the authors predict that China’s recent significant growth rate will run out of steam much like Russia in the early 1990s. The reason: both the Russian and Chinese growth was attainted by reapplication of existing technology. But an extractive political system will not offer sufficient incentives to develop and apply new technology and hence other nations will pass them by economically and competitively.
Further in nations with a history of economic growth will continue to grow because of their “virtuous circle” which have a powerful process of positive feedback that preserves these inclusive institutions in the face of attempts at undermining them and, in fact, sets in motion forces that lead to greater inclusiveness. The logic of virtuous circles stems partly from the fact that inclusive institutions are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrining the rule of law. That positive feedback system will prevail until the nation abandons the rule of law and/or the pluralistic distribution of political power.
Time will tell whether the author’s conclusions will prevail. My fear is that the Chinese will buy or steal the needed innovation to compete. Simultaneously, the U.S. will slowly abandon the rule of law and the pluralistic distribution of power, and the West will follow.
Happy Learning,
Harley
Dear Friends and Family,
This segment’s conclusions are derived by analyzing the failure of nations to grow. The central theme is that the initial political systems of most slow growing countries were extractive, meaning that the political power was vested in a single person or a small group of people – the King, Queen, dictator, or the elites. And that power structure would extract wealth produced in the country either by farming or extraction of natural resources, through taxation or confiscation keeping much of it for themselves and leaving little for the rest of the populace. The extractive political system would stay in place until some set of circumstances resulted in that extractive political system to fail, e.g., through revolution, economic collapse, benevolent elites assuming power, etc. Even so, that change alone would not result in a transformation to an inclusive political system, as the country would be in “the vicious circle” of extractive political institutions forging extractive economic institutions, which in turn create the basis for the persistence of extractive political institutions – a negative resistive cycle.
To achieve an inclusive political system, political centralization is needed with a stable rule of law, stable institutions and the desire for pluralism. Only then will supportive inclusive institutions be formed and sustained both economically and socially. So, the conclusions of the last segment’s success and failure in terms of what is required to break the cycle of poverty are very similar with this segment.
But the authors maintain there is one major difference. The success analysis concluded that democracy was not an imperative in the equation based on the recent success of China. The failure analysis of this segment also concludes that democracy was not an imperative to economic success, but to sustain that success the political system has to be inclusive (democratic) based on the recent failure of Russia. Further, the authors predict that China’s recent significant growth rate will run out of steam much like Russia in the early 1990s. The reason: both the Russian and Chinese growth was attainted by reapplication of existing technology. But an extractive political system will not offer sufficient incentives to develop and apply new technology and hence other nations will pass them by economically and competitively.
Further in nations with a history of economic growth will continue to grow because of their “virtuous circle” which have a powerful process of positive feedback that preserves these inclusive institutions in the face of attempts at undermining them and, in fact, sets in motion forces that lead to greater inclusiveness. The logic of virtuous circles stems partly from the fact that inclusive institutions are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrining the rule of law. That positive feedback system will prevail until the nation abandons the rule of law and/or the pluralistic distribution of political power.
Time will tell whether the author’s conclusions will prevail. My fear is that the Chinese will buy or steal the needed innovation to compete. Simultaneously, the U.S. will slowly abandon the rule of law and the pluralistic distribution of power, and the West will follow.
Happy Learning,
Harley
GLOBALIZATION – SEGMENT 5
LESSONS OF HISTORY -- EXCERPTS
NOTE: ALL EXCERPTS IN THIS SEGMENT ARE FROM WHY NATIONS FAIL by Daron Acemoglu and James A. Robinson
NATIONS WITH LITTLE ECONOMIC PROGRESS: Why is Egypt so much poorer than the United States? To Egyptians, the things that have held them back include an ineffective and corrupt state and a society where they cannot use their talent, ambition, ingenuity, and what education they can get. But they also recognize that the root of these problems is political. All the economic impediments they face stem from the way political power in Egypt is exercised and monopolized by a narrow elite. This, they understand, is the first thing that has to change. Yet, believing this, the protestors of Tahir Square during "Arab Spring" have sharply diverged from the conventional wisdom on this topic. We argue that the Egyptians in Tahrir Square have the right idea. In fact, Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated and has been used to create great wealth for those who possess it. The losers have been the Egyptian people, as they only too well understand. Whether it is North Korea, Sierra Leone, or Zimbabwe, poor countries are poor for the same reason that Egypt is poor.
Politics is the process by which a society chooses the rules that will govern it. Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of nations, some people or groups, such as the elite of the Communist Party of North Korea or the sugar planters of colonial Barbados, will be much better off by setting up institutions that are extractive. When there is conflict over institutions, political institutions are the key determinant. If the distribution of power is narrow and unconstrained, the political institutions are absolutist. In contrast, political institutions that distribute power broadly in society and subject it to constraints are pluralistic. The key to understanding why South Korea and the United States have inclusive economic institutions is not just their pluralistic political institutions but also their sufficiently centralized and powerful states. A telling contrast is with the East African nation of Somalia. Political power in Somalia has long been widely distributed. Indeed, there is not real authority that can control or sanction what anyone does. Society is divided into deeply antagonistic clans that cannot dominate one another. This distribution of power leads not to inclusive institutions but to chaos, and at the root of it is the Somali state's lack of any kind of political centralization, and its inability to enforce even the minimal amount of law and order to support economic activity, trade, or even the basic security of its citizens. We refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fail, we refer to the institutions as extractive political institutions.
Africa: Africa was the part of the world with the institutions least able to take advantage of the opportunities made available by the Industrial Revolution. For at least the last 1000 years, Africa has lagged behind the rest of the world in terms of technology, political development, and prosperity. It is part of the world where centralized states formed very late and very tenuously. Africa shares this trajectory of lack of state centralization with countries such as Afghanistan, Haiti, and Nepal, which have also failed to impose order over their territories and create anything resembling stability to achieve even a modicum of economic progress.
The Middle East: Because the Ottoman state failed to establish a stable order in these areas, property rights were far from secure, and there was a great deal of lawlessness and banditry as armed groups vied for local control. The consequence was that at the time of the Industrial Revolution the economic institutions of the Middle East were extractive. The region stagnated economically. Middle Eastern countries without oil today have income levels similar to poor Latin American countries. So, today it is not as poor as Africa, but the majority of its people still live in poverty.
Russia: The economic trajectory of the Soviet Union provides a vivid illustration of how the authority and incentives provided by the state can spearhead rapid economic growth under extractive institutions and how this type of growth ultimately comes to an end and collapses.
Stalin "collectivized" agriculture and herded all the people in the countryside into giant collective farms run by the Communist Party. This made it much easier for Stalin to grab agricultural output and use it to feed all the people who were building and manning the new factories. The collective farms completely lacked incentive for people to work hard, so production fell sharply. So much of what was produced was extracted that there was not enough to eat. People began to starve to death. In the end, probably six million people died of famine. But the Soviet Union grew rapidly. There was a huge economic potential from reallocating labor from agriculture to industry. Stalinist industrialization was one brutal way of unlocking this potential. By fiat, Stalin moved these very poorly used resources into industry, where they could be employed more productively. In fact, between 1928 and 1960 national income grew at 6% a year, probably the most rapid spurt of economic growth in history up until then. This quick economic growth was not created by technological change, but by reallocating labor and by capital accumulation through the creation of new tools and factories. Though the policies of Stalin and subsequent Soviet leaders could produce rapid economic growth, they could not do so in a sustained way. By the 1970s, economic growth had all but stopped. The Soviet system hit a roadblock, with lack of innovation and poor economic incentives preventing any further progress. Indeed, when Mikhail Gorbachev started to move away from extractive economic institutions after 1987, the power of the Communist Party crumbled and with it the Soviet Union. The most important lesson is that extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elite.
The United States: The institutions in the U.S. South were extractive until the Civil War. Economics and politics were dominated by the southern elite, plantation owners with large land and slave holdings. The South's extractive economic and political institutions made it considerably poorer than the North by the middle of the nineteenth century. The South lacked industry and made relatively little investment in infrastructure. In 1860 its total manufacturing output was less than that of Pennsylvania, New York, or Massachusetts.
Defeat in the Civil War was followed by fundamental economic and political reform at bayonet point. Slavery was abolished and black men were allowed to vote. These major changes should have opened the way for a radical transformation of southern extractive institutions into inclusive ones and launched the South onto a path to economic prosperity. But in yet another manifestation of the vicious circle, nothing of the sort happened. A continuation of extractive institutions, this time of the Jim Crow kind rather than slavery, emerged in the South, with a whole gamut of segregationist legislation being enacted after 1865. This persisted for almost another century. These institutions started to crumble only after the Second World War and then truly after the civil rights movement destroyed the political basis of the system. And it was only after the demise of these institutions in the 1950 and 60s that the South began its process of rapid convergence to the North.
This Vicious Circle: Vicious circles create powerful forces toward the persistence of extractive institutions. History is not destiny, and vicious circles are not unbreakable. But they are resilient. They create a powerful process of negative feedback, with extractive political institutions forging extractive economic institutions, which in turn create the basis for the persistence of extractive political institutions.
NATIONS WITH SIGNIFICANT ECONOMIC PROGRESS: Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens and where the great mass of people could take advantage of economic opportunities. The result was a fundamentally different political and economic trajectory, culminating in the Industrial Revolution.
World inequality today exists because during the 19th and 20th centuries some nations were able to take advantage of the Industrial Revolution and the technologies and methods of organization that it brought while others were unable to do so. Technological change is only one of the engines of prosperity, but it is perhaps the most critical one. The countries that did not take advantage of new technologies did not benefit from the other engines of prosperity, either. This failure was due to their extractive institutions, either a consequence of the persistence of their absolutist regimes or because they lacked centralized states.
The Virtuous Circle: The virtuous circle is a powerful process of positive feedback that preserves these inclusive institutions in the face of attempts at undermining them and, in fact, sets in motion forces that lead to greater inclusiveness. The logic of virtuous circles stems partly from the fact that inclusive institutions are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrined in the rule of law.
WHY NATIONS FAIL TODAY: Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions be cementing the power of those who benefit from the extraction. The solution of the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy, but it is not impossible.
FOREIGN AID: The idea that rich Western countries should provide large amounts of "developmental aid" in order to solve the problem of poverty in sub-Saharan Africa, the Caribbean, Central America, and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions – which result in lack of property rights, law and order, or well-functioning legal systems and the stifling dominance of nations and, more often, local elites over political and economic life. The same institutional problems mean that foreign aid will be ineffective, as it will be plundered and is unlikely to be delivered where it is supposed to go.
THE FUTURE: Nations that have achieved almost no political centralization, such as Somalia and Afghanistan, or those that have undergone a collapse of the state, such as Haiti did over the last several decades are unlikely either to achieve growth under extractive political institutions or to make major changes toward inclusive institutions. Nations likely to grow over the next several decades – albeit probably under extractive institutions—are those that have attained some degree of political centralization.
Our theory also suggests that growth under extractive political institutions, as in China, will not bring sustained growth, and is likely to run out of steam.
Source: Why Nations Fail by Daron Acemoglu and James Alan Robinson (2012)
The unabbreviated version of the above can be found in the pdf document below.
LESSONS OF HISTORY -- EXCERPTS
NOTE: ALL EXCERPTS IN THIS SEGMENT ARE FROM WHY NATIONS FAIL by Daron Acemoglu and James A. Robinson
NATIONS WITH LITTLE ECONOMIC PROGRESS: Why is Egypt so much poorer than the United States? To Egyptians, the things that have held them back include an ineffective and corrupt state and a society where they cannot use their talent, ambition, ingenuity, and what education they can get. But they also recognize that the root of these problems is political. All the economic impediments they face stem from the way political power in Egypt is exercised and monopolized by a narrow elite. This, they understand, is the first thing that has to change. Yet, believing this, the protestors of Tahir Square during "Arab Spring" have sharply diverged from the conventional wisdom on this topic. We argue that the Egyptians in Tahrir Square have the right idea. In fact, Egypt is poor precisely because it has been ruled by a narrow elite that have organized society for their own benefit at the expense of the vast mass of people. Political power has been narrowly concentrated and has been used to create great wealth for those who possess it. The losers have been the Egyptian people, as they only too well understand. Whether it is North Korea, Sierra Leone, or Zimbabwe, poor countries are poor for the same reason that Egypt is poor.
Politics is the process by which a society chooses the rules that will govern it. Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of nations, some people or groups, such as the elite of the Communist Party of North Korea or the sugar planters of colonial Barbados, will be much better off by setting up institutions that are extractive. When there is conflict over institutions, political institutions are the key determinant. If the distribution of power is narrow and unconstrained, the political institutions are absolutist. In contrast, political institutions that distribute power broadly in society and subject it to constraints are pluralistic. The key to understanding why South Korea and the United States have inclusive economic institutions is not just their pluralistic political institutions but also their sufficiently centralized and powerful states. A telling contrast is with the East African nation of Somalia. Political power in Somalia has long been widely distributed. Indeed, there is not real authority that can control or sanction what anyone does. Society is divided into deeply antagonistic clans that cannot dominate one another. This distribution of power leads not to inclusive institutions but to chaos, and at the root of it is the Somali state's lack of any kind of political centralization, and its inability to enforce even the minimal amount of law and order to support economic activity, trade, or even the basic security of its citizens. We refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fail, we refer to the institutions as extractive political institutions.
Africa: Africa was the part of the world with the institutions least able to take advantage of the opportunities made available by the Industrial Revolution. For at least the last 1000 years, Africa has lagged behind the rest of the world in terms of technology, political development, and prosperity. It is part of the world where centralized states formed very late and very tenuously. Africa shares this trajectory of lack of state centralization with countries such as Afghanistan, Haiti, and Nepal, which have also failed to impose order over their territories and create anything resembling stability to achieve even a modicum of economic progress.
The Middle East: Because the Ottoman state failed to establish a stable order in these areas, property rights were far from secure, and there was a great deal of lawlessness and banditry as armed groups vied for local control. The consequence was that at the time of the Industrial Revolution the economic institutions of the Middle East were extractive. The region stagnated economically. Middle Eastern countries without oil today have income levels similar to poor Latin American countries. So, today it is not as poor as Africa, but the majority of its people still live in poverty.
Russia: The economic trajectory of the Soviet Union provides a vivid illustration of how the authority and incentives provided by the state can spearhead rapid economic growth under extractive institutions and how this type of growth ultimately comes to an end and collapses.
Stalin "collectivized" agriculture and herded all the people in the countryside into giant collective farms run by the Communist Party. This made it much easier for Stalin to grab agricultural output and use it to feed all the people who were building and manning the new factories. The collective farms completely lacked incentive for people to work hard, so production fell sharply. So much of what was produced was extracted that there was not enough to eat. People began to starve to death. In the end, probably six million people died of famine. But the Soviet Union grew rapidly. There was a huge economic potential from reallocating labor from agriculture to industry. Stalinist industrialization was one brutal way of unlocking this potential. By fiat, Stalin moved these very poorly used resources into industry, where they could be employed more productively. In fact, between 1928 and 1960 national income grew at 6% a year, probably the most rapid spurt of economic growth in history up until then. This quick economic growth was not created by technological change, but by reallocating labor and by capital accumulation through the creation of new tools and factories. Though the policies of Stalin and subsequent Soviet leaders could produce rapid economic growth, they could not do so in a sustained way. By the 1970s, economic growth had all but stopped. The Soviet system hit a roadblock, with lack of innovation and poor economic incentives preventing any further progress. Indeed, when Mikhail Gorbachev started to move away from extractive economic institutions after 1987, the power of the Communist Party crumbled and with it the Soviet Union. The most important lesson is that extractive institutions cannot generate sustained technological change for two reasons: the lack of economic incentives and resistance by the elite.
The United States: The institutions in the U.S. South were extractive until the Civil War. Economics and politics were dominated by the southern elite, plantation owners with large land and slave holdings. The South's extractive economic and political institutions made it considerably poorer than the North by the middle of the nineteenth century. The South lacked industry and made relatively little investment in infrastructure. In 1860 its total manufacturing output was less than that of Pennsylvania, New York, or Massachusetts.
Defeat in the Civil War was followed by fundamental economic and political reform at bayonet point. Slavery was abolished and black men were allowed to vote. These major changes should have opened the way for a radical transformation of southern extractive institutions into inclusive ones and launched the South onto a path to economic prosperity. But in yet another manifestation of the vicious circle, nothing of the sort happened. A continuation of extractive institutions, this time of the Jim Crow kind rather than slavery, emerged in the South, with a whole gamut of segregationist legislation being enacted after 1865. This persisted for almost another century. These institutions started to crumble only after the Second World War and then truly after the civil rights movement destroyed the political basis of the system. And it was only after the demise of these institutions in the 1950 and 60s that the South began its process of rapid convergence to the North.
This Vicious Circle: Vicious circles create powerful forces toward the persistence of extractive institutions. History is not destiny, and vicious circles are not unbreakable. But they are resilient. They create a powerful process of negative feedback, with extractive political institutions forging extractive economic institutions, which in turn create the basis for the persistence of extractive political institutions.
NATIONS WITH SIGNIFICANT ECONOMIC PROGRESS: Countries such as Great Britain and the United States became rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens and where the great mass of people could take advantage of economic opportunities. The result was a fundamentally different political and economic trajectory, culminating in the Industrial Revolution.
World inequality today exists because during the 19th and 20th centuries some nations were able to take advantage of the Industrial Revolution and the technologies and methods of organization that it brought while others were unable to do so. Technological change is only one of the engines of prosperity, but it is perhaps the most critical one. The countries that did not take advantage of new technologies did not benefit from the other engines of prosperity, either. This failure was due to their extractive institutions, either a consequence of the persistence of their absolutist regimes or because they lacked centralized states.
The Virtuous Circle: The virtuous circle is a powerful process of positive feedback that preserves these inclusive institutions in the face of attempts at undermining them and, in fact, sets in motion forces that lead to greater inclusiveness. The logic of virtuous circles stems partly from the fact that inclusive institutions are based on constraints on the exercise of power and on a pluralistic distribution of political power in society, enshrined in the rule of law.
WHY NATIONS FAIL TODAY: Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions be cementing the power of those who benefit from the extraction. The solution of the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy, but it is not impossible.
FOREIGN AID: The idea that rich Western countries should provide large amounts of "developmental aid" in order to solve the problem of poverty in sub-Saharan Africa, the Caribbean, Central America, and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions – which result in lack of property rights, law and order, or well-functioning legal systems and the stifling dominance of nations and, more often, local elites over political and economic life. The same institutional problems mean that foreign aid will be ineffective, as it will be plundered and is unlikely to be delivered where it is supposed to go.
THE FUTURE: Nations that have achieved almost no political centralization, such as Somalia and Afghanistan, or those that have undergone a collapse of the state, such as Haiti did over the last several decades are unlikely either to achieve growth under extractive political institutions or to make major changes toward inclusive institutions. Nations likely to grow over the next several decades – albeit probably under extractive institutions—are those that have attained some degree of political centralization.
Our theory also suggests that growth under extractive political institutions, as in China, will not bring sustained growth, and is likely to run out of steam.
Source: Why Nations Fail by Daron Acemoglu and James Alan Robinson (2012)
The unabbreviated version of the above can be found in the pdf document below.
| glo_5l_lessons_of_history_--_segment_5.pdf |