Gepost door: Voestermans and Verheggen | 9 augustus, 2013

Why we need strong institutions

Prosperity explained.

In praise of Daron Acemoglu & James Robinson’s book Why Nations Fail.

In recent years numerous books appeared with “Why the West….?” as theme. Ian Morris’s book has it even in the title: “Why the west won, for now” just like Ibn Warraq, “Why the west is best”. Some emphasize the superiority of the West compared to the Rest referring to the crucial applications that were devised in the North-Atlantic region. Niall Ferguson devoted his book Civilization to this theme. He lists six applications – property rights, competition, science, medicine, consumerism and work ethic – that were crucial in out-beating the Rest not because the West was so strong but because the Rest was so weak. One point Ferguson seems to forget and in that respect Acemoglu & Robinson are more complete: the West did not sufficiently share – to put it mildly – its own institutional inventions with their former colonies. One can also say: in order to fully exploit their former colonies the West actively prevented the Rest to become civilized nations.

Daron Acemoglu and James Robinson’s book “Why Nations Fail. The origin of prosperity and poverty” corroborates Ferguson’s argument with facts that compared to Ferguson not just come from China and the Ottoman Empire – the competitors of the West – but from all over the world. The emphasis is as much on the present as on the past. The facts are about prosperity and success on the one hand and poverty and failure on the other due to the development of economically productive or destructive institutional means for control of the behaviour of especially the elite.

The searchlight for these facts is a theory in which two types of institutions are distinguished, inclusive and extractive ones. The two types are illustrated with telling examples from all over the planet. The authors take pains to root the inclusive ones in historical events in which a nation gradually drifted towards institutions brought about by an elite that organized its own well-understood self-interest by not excluding those lower in rank. Those institutions corroborate private property, rule of law, public services, new businesses and personal careers of people of all ranks (p.76). For all this a strong state is a conditio sine qua non.

To give one example: A complete chapter (7) is devoted to the changes caused by the Glorious Revolution of 1688, which turned England into one of the first states with rational property rights, stable finance, open trade, and creative responsiveness to economic needs. This revolution created in the New World the preconditions for a form of colonization, which at least respected the colonizers’ property rights. It allowed them to have their own land and home after years of properly serving the landlord. Comparison with another colonizer, Spain, illustrates the devastating effects of extractive institutions.  Spain maintained a rather feudal system with landlords that put their subjects to work without any sharing of possessions and power, a contrast Ferguson has noticed as well. It inspired him to pose the question: by whom would you prefer to be colonized? By England or Spain if you look at what happened later on in the USA and in Latin America? In Peru for example the extractive institution of the “mita  system” and the “economienda” were preserved. The mita was already used by the Inca rulers to force the male population between 15 and 50 to work for them. The economienda was newly devised by the Spaniards to organize and control the workforce. Both institutions left the power to the ruling agencies without allowing any farmer to begin for himself. The authors claim that the traces of mita are still present: the province of Acomayo is a lot poorer than Calca because the latter was outside the mita area. (In the book ‘Wat wij weten’ ( What we know) by Arthur Umbgrove I came across an example of an inclusive one: rhaken in Syria: you pay a large sum of money for a house. You go to live in it and the owner pays you back after you leave. Meanwhile he can invest your money. If after a couple of years he can’t pay you back, you keep the house. It is an insitution of lending without a bank, because banks are not trustworthy in Syria.)

In order to understand the development of institutions toward inclusiveness or extraction the authors add two mechanisms to their taxonomy of institutions: slow but gradual drifts of existing institutions in one direction or the other due to decisive events at critical junctures in the course of important events in history from where different routes are taken. Examples of such drifts are the drift away from feudalism towards hired and paid employment due to the fact that after the Black Death in some countries the work force was decimated. There were so few workers that the rulers had to change the conditions of employment to get things done. At that juncture (the Plague) the path towards better payment and better provisions was taken. Eastern Europe on the contrary maintained the feudal order. The drift was not toward better conditions but toward enlarging the estate and organizing together the feudal estates. Since there were not enough larger cities or other spots where upheaval could by initiated, the landlords simply carried on by providing the existing serfs with reliable jobs under strict control.  No protest was heard, whereas in England the peasants rioted in the Peasants’ Revolt of 1381. By 1700 two entire different tracks of prosperity developed. One laid the foundation for inclusive, the other for extractive institutions. This is still very useful information for a proper understanding of what happened in Russia for example compared to Western Europe,  to cut the argument short that the authors so richly develop in their book.

The idea of the combination of juncture and drift allows for a large variety of events leading up institutional differentiation. The authors amply illustrate their theoretical position, which makes the book really fascinating. The book takes you on a tour du monde entier  and points out what historical events were conductive to greater endurable prosperity for many or only limited, short-term advancement for a few. All sorts of development in a rich variety of countries are made transparent and understandable this way.

To give a personal example: I read about Egypt in Sylvia Nasar’s book Grand Pursuit in which she relates Egypt’s fate. Why was the nation from mid-1800 onward so prosperous and then in the Fin de Siècle just slid back into poverty and misery in order to stay there up till this day? Using A&R’s tools you immediately realize that the khedive Ismail Pasha took the route to extractive institutions. With only his personal power position in mind he invested money that he borrowed irresponsibly from the West to finance projects aiming at the modernization of the nation. What I immediately understood here results from applying what I learned in the book about Congo, which went through a comparable phase of creating extractive institutions instead of inclusive ones. Or take Botswana, which remained a rather stable African nation due to an early attempt at inclusive institutions under chiefs that used the existing institution of “kgotla”, a place where one could frankly speak about matters of regulation. It therefore was not too far fetched for Botswana to become democratic and hold elections right after independence.

Some critical remarks need to be made as well. The book leans heavily on the idea of elites doing the right thing or going astray by becoming narrow-minded and egotistic.  This idea is borrowed I think from Joseph-Alois Schumpeter who emphasizes as Sylvia Nasar rightfully notices, science and technology as products of Bourgeois high class inventiveness. This elite is also the source of creative destruction – a notion borrowed from Schumpeter as well -, which enforces new developments out of the old and outdated ways of doing things. In doing so this creative part of the elite runs into the conservatism of another part of the very same elite that wants to keep things as they are. The elite is thus a bulwark of conservative forceson the one hand, and on the other of innovation. How this all works out in actual social practice is not something the book pays attention to.

What the heck is the elite one may asks after having finished the book? Is it a collection of good and bad guys? But how do they become this way? The cliques around for example Robert Mugabe, Kim Jong Il, Islam Karimov (Uzbekistan), Siaka Stevens (Sierra Leone), and the Chinese People’s Party elite are responsible for the maintenance of extractive institutions. How come? Where does the change come from? From other elites, may be? You can’t engineer prosperity, the authors warn (446). What you can do is searching for the way extractive institutions are maintained. But part of that problem is again the elite. It goes in circles here and the book offers no way out. Elites are expert groups, that is for sure, who succeed in tuning the sentiments and cognition of those who follow to produce the desired behaviour. What makes it all tick is left to the reader’s imagination. Here a precise behavioural analysis of elite conduct is mandatory. Culture as Embodiment provides the tools.

I must make one exception with regard to behavioural information. On page 38 ff. A&R give an example of how two members of the elite use the existing institutions, or better make us aware of how they are subjected to the institutions or can manipulate them: Bill Gates versus Carlos Slim. This is particularly interesting for the Dutch readers since Slim is on the brink of taking over the telecom company of KPN in the Netherlands (it is August 9th 2013) . Gates had to respect the inclusive institutions of the USA in that he had to refrain from monopoly power. The USA law enforcement made that clear to him in 1998.  Slim and the telecom company Telmex on the other hand used a Mexican law of 1857, which is called Recurso de Amparo, that is literally,  as A&R claim, an appeal for protection. It is  to cite A&R: “in effect a petition to argue that a particular law does not apply to you (…It) was intended as a safeguard of individual rights and freedom. In the hands of Telmex (…) it has become a formidable tool for cementing monopoly power. Rather than protecting people’s rights, the amparo provides a loophole in equality before the law” (p. 40). Slim took recourse to that law turning it into an extractive institutional provision. He had enough bribing money and connections to do that, A&R claim. Hopefully the Dutch law has some limiting power to restrict Slim in the way the USA restricted Gates!

For the remainder, there is quite a lack of a behavioural perspective in the book. No attempt is made to provide us with a behavioural analysis of institutional effects. Why do people support bad leaders who maintain extractive institutions? Is it out of fear; are the masses lured into something? Economy and political science score low on behavioural science knowledge. They generally stick to a rather outdated form of behaviourism. Yet, these day the science of behaviour is mature enough to understand how groups operate, the individual senses are calibrated, feelings and sentiments are tuned, cognitions formed. The virtuous and vicious circles of broad coalitions against absolutism that according to the authors’ analysis spiral up toward inclusiveness and the vicious ones that spiral down into extraction cry for a behavioural analysis of their workings. Why Nations Fail needs a behavioural component, but one in which the message of the book is loudly supported.

Inclusive Institutions are the only means to counter the universal law of inequality.

Paul Voestermans

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