Friday, January 25, 2013

Extractive or inclusive; vicious or virtuous?

When I was growing up, economic and political development was supposed to involve a linear march toward riches and progress. Think W.W. Rostow's stages of growth. Nowadays the more apt metaphor seems to be a circle, vicious or virtuous.

James A. Robinson and Daron Acemoglu's Why Nations Fail: The Origins of Power, Prosperity and Poverty is one of those "big books" -- an attempt to envision a grand unifying theory that the current of era of post-Marxist awareness that modern capitalism has kicked the Anthropocene into high gear necessarily evokes. I found it interesting and often persuasive, though, as with all such efforts, only time will tell how predictive their thinking proves.

Here's how the authors describe their project:

…we need a theory of why some nations are prosperous while others fail and are poor. This theory needs to delineate both the factors that create and retard prosperity and their historical origins. This book has proposed such a theory.

Our theory has attempted to achieve this by operating on two levels. The first is the distinction between extractive and inclusive economic and political institutions. The second is our explanation for why inclusive institutions emerged in some parts of the world and not in others. While the first level of our theory is about an institutional interpretation of history, the second level is about how history has shaped institutional trajectories of nations.

Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy. Similarly, extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.

These tendencies do not imply that extractive economic and political institutions are inconsistent with economic growth. On the contrary, every elite would, all else being equal, like to encourage as much growth as possible in order to have more to extract. Extractive institutions that have achieved at least a minimal degree of political centralization are often able to generate some amount of growth. What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ultimately short lived. Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability.

The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive economic and political institutions. But neither the vicious nor the virtuous circle is absolute. In fact, some nations live under inclusive institutions today because, though extractive institutions have been the norm in history, some societies have been able to break the mold and transition toward inclusive institutions. Our explanation for these transitions is historical, but not historically predetermined.

That's all pretty dense and abstract. Our authors eagerly apply their model concretely. Perhaps it's not surprising that they are pretty confident that they can predict what countries will be rich in coming decades:

…vicious and virtuous circles generate a lot of persistence and sluggishness. There should be little doubt that in fifty or even a hundred years, the United States and Western Europe, based on their inclusive economic and political institutions, will be richer, most likely considerably richer, than sub-Saharan Africa, the Middle East, Central America, or Southeast Asia.

On the other hand, they are also pretty sure that the continuing strength of extractive political institutions (arbitrary and corrupt rule by a self-selecting elite) ensures that China will reach a limit to the extension of its somewhat inclusive economic development.

…Even if Chinese economic institutions are incomparably more inclusive today than three decades ago, the Chinese experience is an example of growth under extractive political institutions. Despite the recent emphasis in China on innovation and technology, Chinese growth is based on the adoption of existing technologies and rapid investment, not creative destruction. An important aspect of this is that property rights are not entirely secure in China. Every now and then, … some entrepreneurs are expropriated. Labor mobility is tightly regulated, and the most basic of property rights, the right to sell one's own labor in the way one wishes, is still highly imperfect. The extent to which economic institutions are still far from being truly inclusive is illustrated by the fact that only a few businessmen and -women would even venture into any activity without the support of the local party cadre or, even more important, of Beijing. The connection between business and the party is highly lucrative for both. Businesses supported by the party receive contracts on favorable terms, can evict ordinary people to expropriate their land, and violate laws and regulations with impunity. Those who stand in the path of this business plan will be trampled and can even be jailed or murdered.

Though skeptical about China's potential to generate a virtuous circle in which inclusive economic and political institutions support each other, they are much more optimistic about developments in contemporary Brazil.

The formation of a broad coalition in Brazil as a result of the coming together of diverse social movements and organized labor has had a remarkable impact on the Brazilian economy. Since 1990 economic growth has been rapid, with the proportion of the population in poverty falling from 45 percent to 30 percent in 2006. Inequality, which rose rapidly under the military, has fallen sharply, particularly after the Workers' Party took power, and there has been a huge expansion of education, with the average years of schooling of the population increasing from six in 1995 to eight in 2006. Brazil has now become part of the BRIC nations (Brazil, Russia, India, and China), the first Latin American country actually to have weight in international diplomatic circles. The rise of Brazil since the 1970s was not engineered by economists of international institutions instructing Brazilian policymakers on how to design better policies or avoid market failures. It was not achieved with injections of foreign aid. It was not the natural outcome of modernization. Rather, it was the consequence of diverse groups of people courageously building inclusive institutions. Eventually these led to more inclusive economic institutions. But the Brazilian transformation, like that of England in the seventeenth century, began with the creation of inclusive political institutions. But how can society build inclusive political institutions? History, as we have seen, is littered with examples of reform movements that succumbed to the iron law of oligarchy and replaced one set of extractive institutions with even more pernicious ones. …

There are many parallels between [previous instances of] historical processes of empowerment and what took place in Brazil starting in the 1970s. Though one root of the Workers' Party is the trade union movement, right from its early days, leaders such as Lula, along with the many intellectuals and opposition politicians who lent their support to the party, sought to make it into a broad coalition. These impulses began to fuse with local social movements all over the country, as the party took over local governments, encouraging civic participation and causing a sort of revolution in governance throughout the country. … empowerment at the grass-roots level in Brazil ensured that the transition to democracy corresponded to a move toward inclusive political institutions, and thus was a key factor in the emergence of a government committed to the provision of public services, educational expansion, and a truly level playing field.

Short excerpts cannot do justice to this ambitious project. I hope these quotations have piqued interest.

I was fascinated by this thesis for use in thinking about how development occurs within nations when countries are treated as distinct entities. But I wondered how these authors' extractive v. inclusive frame worked in the context of a global system that exploits and exacerbates poor countries' internal contradictions to the benefit not only of rich global elites but also to some extent of the general populations of rich countries. There are many examples of transnational extractive institutional arrangements. Remember the WTO, the IMF, the World Bank? Can a framework so rooted in the experience of particular discrete states be usefully applied to the era of universal global capitalism? There are hints here, but the nation is the primary unit of analysis -- and possibly not the true way the planet is presently divided, if it ever was.

I read this book during the U.S. election campaign and couldn't shake the image of Romney as the slippery champion of extractive elites who promote their interests by way of the Republican Party. The book's frame describes these forces to a T. Republicans increasingly aim to interrupt the U.S. virtuous circle embodied in electoral institutions that maintain some measure of inclusive equality among citizens. It's not just attachment to patriotic hokum when progressives stick up for the democratic rights of all of us. Robinson and Acemoglu remind us that the decisions about what kind of country we are going to have happen in history -- there's nothing that ensures we'll keep our relatively inclusive economic and political institutions, though inertia helps. These inclusive institutions are worth defending and these authors would contend that organized collective defense can matter.

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