Acemoglu and Robinson Answer Your Questions

Last week, we solicited your questions for economist Daron Acemoglu and political scientist Jim Robinson, who just published a new book called Why Nations Fail: The Origins of Power, Prosperity, and Poverty and are now blogging on a variety of interesting development topics.

Their thoughtful responses below cover everything from robber barons to the artificial construction of African nations to whether the race of a country’s leaders determines its success.  A big thanks to Daron, Jim, and all our readers for another great Q&A.  

First, a note from Daron and Jim: “We thank everybody for these excellent questions and comments. We had to pick a few to be able to provide detailed answers.

Q.In chapter 11, you cite government “trust busting” as an example of responsible behavior by government institutions meant to bring order to markets. However, while castigating the “robber barons,” you never really explain what they did that was so bad. To the extent that any explanation is provided, it is that the robber barons established monopolies, which *implies* higher prices for consumers, but no actual evidence of this occurring is presented. In contrast, in The Rational Optimist, author Matt Ridley notes the following:

Rail freight charges fell by 90 percent between 1870 and 1900. There is little doubt that [Cornelius] Vanderbilt sometime bribed and bulled his way to success, and that he sometimes paid his workers lower than others — I am not trying to make him into a saint — but there is also no doubt that along the way he delivered to consumers an enormous benefit that would otherwise have eluded them — affordable transport. Likewise, Andrew Carnegie, while enormously enriching himself, cut the price of a steel rail by 75 percent in the same period; John D. Rockefeller cut the price of oil by 80 percent. During those thirty years, the per capita GDP of Americans rose by 66 percent. They were enricher barons too.

So actually, the actions undertaken by Roosevelt to disrupt the robber barons seems to be best understood as needless government meddling rather than part of some virtuous cycle. What is your response? -Colin

A.The robber barons emerged, just like the billionaires of today, during a specific period in which new technologies created opportunities for enrichment. These technologies and many of the firms that exploited them brought new products to consumers and lower costs for existing products and services. This is how creative destruction is supposed to work. But when left unchecked, all companies, even successful and inventive ones like Microsoft and Google, will also try to monopolize the market, create entry barriers, and tilt the playing field to their favor. The robber barons did this very successfully. For example, the price of refined oil declined sharply in the second half of the 19th century as Standard Oil established its dominant position in the market. Though some of this resulted from Standard Oil’s efficient organization, technological developments also played a significant role. In the process, Standard Oil also came to dominate 90 percent of the market. According to the US Department of Justice, it did so with unfair and discriminatory practices, and it charged low prices to drive out competitors but high prices when it faced little competition. So the evidence is that, as with all monopolies, Standard Oil was not only charging high prices when it could, but that it would and did limit competition to be able to do so.

But the real problem went beyond economics. What enabled the robber barons to do so was their increasing political power. At a point in history when US institutions were still developing — with machine politics everywhere and the Senate being unelected and highly corrupt — turning economic power into political power was easy. In this, they threatened the inclusivity of US institutions more than the economic inequality that they created. It is for this reason that the Progressive movement and the politicians who made their causes their own, such as Theodore Roosevelt, William Taft, and Woodrow Wilson, should be viewed as protectors of inclusive institutions rather than usurpers.

Q.“Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of a nation, some people or groups, such as the elite of the Communist Party of North Korea [...] will be much better off by setting up institutions that are extractive.”

Do you actually suggest that the leftists in North Korea – and by analogy in East Germany – were malicious and intended to enslave the population of the countries they took over from the very beginning?  Facing leftists today, I think that it is quite plausible the communists back in the day were also just fundamentally stupid and misguided but not evil. Some members of the former East German elite still profess their belief in their ideology and none (afaik) came forward and admitted that they only used it to cover up their economic exploitation.

How would your story change if extractive institutions are sometimes set up “by accident” and maintained (for the first few years, at least) because no member of the new elite wants to “lose her face’”by backpedaling? – Nick

A.The communist regimes in East Germany and Soviet Russia, and today in North Korea, are perfect examples of extractive regimes, not only because they failed to provide economic incentives but also because they concentrated political power in the hands of a very narrow elite and backed it up with coercion and force. Just like other extractive regimes, they censored information and used heavy propaganda. Just like Russia and Austria-Hungary in the 19th century, they opposed innovation and reform precisely because this would destabilize their power. North Korean elites even go so far as threatening nuclear war — though, as we have seen recently, not so successfully — in order to consolidate their power at home.

Was this all just a ruse from the beginning? Or did the early leaders such as Lenin and Kim Il-Sung genuinely believe in a project of building a better world? The answer is probably a bit of both. They may have started with better intentions, and they may have been more optimistic about what they would be able to achieve under repression. Nonetheless, history leaves little doubt that their approach was repressive from the beginning, and they did not intend to create political institutions that would distribute political power equally across different social groups, views, and individuals in society. There can be much debate about whether Lenin was indirectly responsible for Stalin‘s crimes. But there should be no doubt that the political party and the institutions that Lenin started creating naturally led to Stalin’s dictatorship. In this sense, the Soviet Union and all of the other communist regimes were extractive from the get-go.

 

Q.What do you think of Francis Fukuyama’s review of your book? I checked your blog and didn’t find any response to his assessment of the short-comings of your approach. -Jack Sparrow

A. Francis Fukuyama’s review seems to miss the point.

There are several incorrect or misleading statements in it. It would be too much to go through each of them, but let’s focus on some of the more important ones.

First, he writes “They are making almost identical point to that one made in the thousand nine book by Douglass North, John Wallis, and Barry Weingast.” Our work in general, and Why Nations Fail, built on North’s seminal ideas and on North and Weingast and on North, Wallis and Weingast (NWW). But there are major differences. The most important one is about the role of politics. In our book, we argue that a framework built on the primacy of politics — political institutions being forged and changing as a result of conflict, and in turn shaping economic institutions and then innovation and investment — will go a long way. Our framework also clarifies that what we call extractive institutions are there by design. NWW put much more emphasis on economic and social factors. For example, their concept of “open access order,” far from being similar to “inclusive political institutions” as Fukuyama argues, is defined as a “social order” similar to Seymore Martin Lipset‘s “development complex” (page 3). In particular, NWW put the emphasis much more on the existence of business and other non-government organizations, impersonal exchange, and beliefs supporting cooperation in society. Though our work owes much to North and his co-authors, it is disingenious to imply that we have just re-created their argument under a different guise. In fact, NWW are very explicit that when they talk of political change, they build on our past work, in particular our earlier book, Economic Origins of Dictatorship and Democracy, as well as our earlier work.

Second, Fukuyama argues that our distinction between inclusive and extractive is “sharply bifurcated.” If by this he means that inclusive and extractive political (and economic) are defined as extreme cases, this is exactly right and it is clearly stated in the book. Most countries are in shades of gray, but it is most useful to start with the black and the white to understand what’s going on. If by this he means that we think societies and reality are fully inclusive or fully extractive, this is obviously not true as most of the book is about degrees of extraction and small steps towards inclusive institutions. Our discussion of China, which Fukuyama further comments on, is for example about this: we argue China did not start growing by becoming fully inclusive, but by taking some important — and yet limited steps — towards inclusive economic institutions.

Third, Fukuyama accuses us of not unpacking the constituent parts of inclusive and extractive institutions. He even writes: “There is for example a large literature comparing the separate impacts of a modern state, rule of law, and democracy on growth, which tends to show that the first two of these factors have a far greater influence on outcomes than democracy.” Now there are two problems with Fukuyama’s statement. First, the literature he seems to have in mind is the one on cross-country growth empirics, which sometimes runs kitchen-sink regressions including several indices at the same time. But few economists would take such regressions seriously given the endogeneity and reverse-causality concerns. Second, a large part of our book is in fact devoted to explaining why many extractive (and inclusive) aspects will travel together — because of the feedback between these different aspects.

Fourth, Fukuyama claims that China’s rapid growth invalidates our theory. Why this is not the case is discussed both in Chapter 5 and Chapter 15. We discuss the spectacular economic performance of the Soviet Union. Perhaps Fukuyama would also say that the fact that the Soviet Union grew so rapidly for over four decades invalidates the theory that markets are better than central planning in generating innovation and economic growth — let alone the fact that, subsequently, the Soviet Union crashed and burned.

Our theory certainly does not explain all sources of success and failure of nations. Nor do we claim to be the final word on this huge question. There are thus both many new and interesting approaches to be developed and many intelligent critiques of our work to be written. Fukuyama’s is not one of them.

 

Q.How crucial to success/failure is the fact that many “nations” in the developing world are actually artificial constructs, i.e. legacies of colonial-era maps that papered over tribal/ethnic boundaries. -MrAtoZ 

A.The fact that many post colonial nations had arbitrary boundaries drawn on maps by colonial powers is certainly a factor that helps their extractive institutions persist.

Colonial powers often placed into one “country” different groups with long histories of conflict and mutual enmity. A classic example would be Uganda. The name from the country comes from Buganda, the largest pre-colonial state at the time of the British colonization. But Uganda also includes Basoga, Bunyoro, Toro, and Ankole, all independent states with long histories of conflict with Buganda going back hundreds of years in some cases. Suddenly all these people were supposed to be Ugandans at independence after the British had tried to rule them all via Buganda chiefs. Buganda’s boundaries even expanded with British help. The president of independent Uganda was going to be the King of Buganda. Needless to say, that did not last long, and he was expelled from the country by the first Prime Minister (non-Bugandan) Milton Obote. Colonial rule was extractive, and the legacy of arbitrary states has aided in the persistence of extractive institutions. This is because it is very difficult to have political power distributed in an inclusive way when each group is afraid of domination by another and these long-run animosities. Such clear distinctions also encourage the maintenance of extractive economic institutions to the benefit of whichever group has power. This also leads to intense conflict, as it did in Africa after independence. The historian Richard Reid from the School of Oriental and African Studies in London has actually shown that many conflicts in current East Africa reproduce historical conflicts.

Q.While it is easy to imagine policies that change or develop formal institutions, how does one go about changing informal institutions? Is it best to do so indirectly? To what degree should states even involve themselves in trying to change informal institutions? -JCB

A.The distinction between formal and informal institutions is an important one, though we do not use it in our book. For some social scientists, institutions are only things that can be written down like laws or the constitution. But our definition of institutions is broader than that from the beginning. We are explicit that many important institutions are social norms that people follow and which heavily shape their behavior, but which are not written down. Norms like this may be very difficult to change, though written rules are also hard to change in the sense that writing rules down doesn’t mean people will obey them. Even written rules have to be enforced. How can you change informal rules? The main way we think about this in the book is in terms of power and empowerment. Institutional transitions, whether formal or informal, are usually caused by changes in the distribution of political power in society. Even the English Glorious Revolution, which had huge impacts on British institutions, changed not just formal but also informal institutions. For instance, the fact that Parliament met every year after 1688 was not written down as a rule, but Parliament emerged as a powerful institution influencing the way the king and executive functioned. This emerged out of the massive distribution of power created by the revolution. You can read more about this precise institutional change here.

So while it is difficult to change informal institutions directly, it is easier to see how you can change the distribution of power in society, for example, by helping people to act collectively, and this will then tend to change institutions both formal and informal. 

Q.I am from Haiti, a country that you guys speak of quite often. I moved here to the States about ten years ago for school. Anyway, I’ve always wondered why countries dominated by blacks have done so terribly (and I am not trying to make us look stupid)?

My questions stems from the fact that even within Haiti, the wealthier people are the sons and daughters of ex-pats from Europe or Syria, but in the larger picture, countries heavily dominated by blacks tend to fail. I don’t know many countries in the world where blacks are at the top of the social pyramid; it is concerning. Does it have to do with slavery; more than slavery, education? And how would it be solved in a 30-year plan for example? -Jean-Marc Davis

A.The fact that nearly all countries which are headed by black people are poor is a coincidence. There is nothing intrinsic about black people that makes such countries poor. Just look at Botswana — it is run by and for black people, but it is one of the great economic success stories of the past 50 years. The same is true of several Caribbean countries, such as the Bahamas. The reasons for this are several-fold. Let’s focus just on Africa. Historically (before European influence), Africa developed extractive institutions for reasons that are not well understood. For instance, the fact that the construction of centralized states in Africa lagged behind Eurasia is not really understood. This history of extractive institutions then created a terrible vicious circle in the early modern period. First, the slave trade destroyed states and made economic institutions more extractive, and the poverty of Africa then allowed it to be colonized by Europeans. This left a legacy of extractive institutions with which African countries have been struggling since independence. But there is nothing inevitable in this process. Fifty years ago, you would have asked “How come every country run by Asians is poor”? We don’t ask that because we know that many Asian countries have changed their development paths. They, of course, had advantages Africa did not have, such as a history of centralized states. More broadly, there is nothing inevitable about the fact that the Industrial Revolution happened in Britain and soon after spread to Western Europe and these countries’ superior technologies allowed them to colonize large parts of the world. This was the outcome of a long contingent process of institutional change. This process did not happen in Africa, but that has nothing to do with black people but rather different histories of institutions and different shocks. In the book, we illustrate this by talking about Ethiopia. In 400AD, Ethiopia looked very similar to states in the Mediterranean basin, but then it experienced very different shocks and while these other societies changed, Ethiopia got stuck.

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  1. Mike B says:

    I haven’t read the book, so excuse me if this is addressed, but I have always been fascinated in the role social trust plays in the success of countries. Where there are low levels of general social trust (such as only extending to the family or tribe) then any sort of development will be hamstrung by corruption and individual decisions predicated on the belief that the “other” is out to screw you over. One of the good examples given was Russian apartment buildings where common areas were always rundown even if individual apartments were well maintained. Residents couldn’t trust their neighbors enough to work together to maintain the common spaces because for decades any neighbor was a potential government informant.

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  2. cackalacka says:

    Nick sounds like he’d be a hit at parties.

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  3. mannyvel says:

    One thing that’s never really discussed is how the colonial boundaries were drawn. It can be argued (though I’ve never seen it written) that England’s colonial disaster made everyone much more aware of how the lack of conflict in colonial territories is problematic – and that subsequent colonial borders were drawn to ensure native conflict, so as to retard to growth of political unity.

    This looks to be true for non-Spanish colonies, and would explain the Indian, Middle East, and African hodgepodge of overlapping tribal and geographic regions.

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    • Enter your name... says:

      I’m not sure what you mean by “never really discussed”. There are whole books written about it.

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  4. Phillip Black says:

    I’m surprised you allowed the first question. It’s a hot political one. That said let’s crush their answer.

    First, there is no evidence that Standard Oil used predatory pricing. Second, even if they did it’s great for customers because they get insanely lower prices. Third, even if this imaginary situation were to happen and they were to drives businesses away, as soon as they started to make economic profit again new businesses would enter the market. Forth, ‘they controlled 90% of the market.’ So what?

    Even forgoing what is posted above, their solution is to create corruptible institutions to regulate them like the ICC. We of course know from George Stieglitz’s work and a great chapter in Free to Choose that this institution fell to regulatory ‘capture’ and became pawns of the trucking institutions, therefore being the very extracting institutions they decry!

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    • Enter your name... says:

      > First, there is no evidence that Standard Oil used predatory pricing.

      I suppose that it depends on what you call “evidence”, but this is so well accepted that it appears in high school history textbooks.

      > Second, even if they did it’s great for customers because they get insanely lower prices.

      In the short term. After the competition has been killed off, the prices were much higher.

      > Third, even if this imaginary situation were to happen and they were to drives businesses away, as soon as they started to make economic profit again new businesses would enter the market.

      After you’ve bankrupted the only guy in the area that knew how to do this, it’s hard for him to start a new business to compete with you next year. (Keep in mind that this wasn’t in the credit era: to start any large, capital-intense business, you had to be wealthy to begin with.)

      > Forth, ‘they controlled 90% of the market.’ So what?

      That means that 90% of the market was subject to their pricing, which was not “insanely low” after the competition was destroyed.

      Additionally, it puts society in a risky position when that market constitutes important infrastructure. Remember those “too big to fail” banks? What do you think would happen to society these days, if one company supplied 90% of (say) the gasoline or heating oil, and it failed?

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      • cthulhu says:

        IMHO, the chief problem to a monoculture / monopoly is lack of redundancy, as you say. Analysis of complex dynamical systems shows that a good way to improve the robustness of such a system is to build in multiple levels of redundancy; then you never have the “too big to fail” scenario. I think that Matt Ridley has a good point, but maybe the answer is that things would have been even better for the consumer and the nation as a whole if there had been competition instead of the Rockefeller / Carnegie / Morgan / etc monopolies.

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      • Imad Qureshi says:

        I think your assumption that “only guy in the area that knew how to do this, it’s hard for him to start a new business to compete with you next year” is quite debatable. Evidence shows for most businesses this is not true. The skilled labor, machines and property don’t just vanish. They are acquired by some other investor if there is good rent (which will be as soon as Standard oil raises its prices to monopoly level).

        Second, your reference to high school books. You really think everything we are teaching our kids in school is objective and without bias, specially history?

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  5. Q says:

    It would be interesting to not, that societies that had more inclusive characters (lets say the western societies) on the insdie (which is debatable, because something that may seem more inclusive may be just much more sophisticated version of exclusive society) those societies had profoundly established heavily exclusive dominance over less developed societies. The hyppocrit character of the western inclusive society is vivid here.

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  6. Don says:

    Oh boy! This book is on my wish list as a must read as I prepare for the inevitable euro economic black-hole meltdown. What’s going on in Greece just blows my mind. It was only a few years back when they were the going through an economic miracle.

    I’d wish they’d slow things down a bit ’cause I haven’t finished my study on the Great Recession (along with related study of the Great Depression, and the Savings and Loan Crisis. Plus, Oonagh McDonald just came out with a book on Fannie and Freddie). Gosh! What a facinating planet we are living on.

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