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Quis custodiet ipsos custodes?

Government, Geography, and Growth

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The True Drivers of Economic Development

According to the economist Daron Acemoglu and the political scientist James Robinson, economic development hinges on a single factor: a country’s political institutions. More specifically, as they explain in their new book, Why Nations Fail, it depends on the existence of “inclusive” political institutions, defined as pluralistic systems that protect individual rights. These, in turn, give rise to inclusive economic institutions, which secure private property and encourage entrepreneurship. The long-term result is higher incomes and improved human welfare.

What Acemoglu and Robinson call “extractive” political institutions, in contrast, place power in the hands of a few and beget extractive economic institutions, which feature unfair regulations and high barriers to entry into markets. Designed to enrich a small elite, these institutions inhibit economic progress for everyone else. The broad hypothesis of Why Nations Fail is that governments that protect property rights and represent their people preside over economic development, whereas those that do not suffer from economies that stagnate or decline. Although “most social scientists shun monocausal, simple, and broadly applicable theories,” Acemoglu and Robinson write, they themselves have chosen just such a “simple theory and used it to explain the main contours of economic and political development around the world since the Neolithic Revolution.”

Their causal logic runs something like this: economic development depends on new inventions (such as the steam engine, which helped kick-start the Industrial Revolution), and inventions need to be researched, developed, and widely distributed. Those activities happen only when inventors can expect to reap the economic benefits of their work. The profit motive also drives diffusion, as companies compete to spread the benefit of an invention to a wider population. The biggest obstacle to this process is vested interests, such as despotic rulers, who fear that a prosperous middle class could undermine their power, or owners of existing technologies, who want to stay in business. Often, these two groups belong to the same clique.

The authors’ story is soothing. Western readers will no doubt take comfort in the idea that democracy and prosperity go hand in hand and that authoritarian countries are bound to either democratize or run out of economic steam. Indeed, Acemoglu and Robinson predict that China will go the way of the Soviet Union: exhausting its current economic success before transforming into a politically inclusive state.

This tale sounds good, but it is simplistic. Although domestic politics can encourage or impede economic growth, so can many other factors, such as geopolitics, technological discoveries, and natural resources, to name a few. In their single-minded quest to prove that political institutions are the prime driver or inhibitor of growth, Acemoglu and Robinson systematically ignore these other causes. Their theory mischaracterizes the relationship among politics, technological innovation, and growth. But what is most problematic is that it does not accurately explain why certain countries have experienced growth while others have not and cannot reliably predict which economies will expand and which will stagnate in the future.

Diagnosing Development

Acemoglu and Robinson’s simple narrative contains a number of conceptual shortcomings. For one, the authors incorrectly assume that author-itarian elites are necessarily hostile to economic progress. In fact, dictators have sometimes acted as agents of deep economic reforms, often because international threats forced their hands. After Napoleon defeated Prussia in 1806 at the Battle of Jena, Prussia’s authoritarian rulers embarked on administrative and economic reforms in an effort to strengthen the state. The same impulse drove reforms by the leaders behind Japan’s Meiji Restoration in the late nineteenth century, South Korea’s industrialization in the 1960s, and China’s industrialization in the 1980s. In each case, foreign dangers and the quest for national opulence overshadowed the leaders’ concerns about economic liberalization. In their discussion of the incentives facing elites, Acemoglu and Robinson ignore the fact that those elites’ political survival often depends as much on external as internal circumstances, leading many struggling states to adopt the institutions and technologies of the leading states in a quest to close economic gaps that endanger the state and society.

The authors also conflate the incentives for technological innovation and those for technological diffusion. The distinction matters because the diffusion of inventions contributes more to the economic progress of laggard states than does the act of invention itself. And authoritarian rulers often successfully promote the inflow of superior foreign technologies. A society without civil, political, and property rights may indeed find it difficult to encourage innovation outside the military sector, but it often has a relatively easy time adopting technologies that have already been developed elsewhere. Think of cell phones. Invented in the United States, they have rapidly spread around the world, to democracies and nondemocracies alike. They have even penetrated Somalia, a country that has no national government or law to speak of but does have a highly competitive cell-phone sector. Read more in the Foreign Affairs

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Written by Theophyle

October 10, 2012 at 12:45 pm

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