Friday, August 24, 2012

On "Why Nations Fail"

So Jeff Sachs, via MR, argues that geography is as much a factor in development as political institutions,
In places where production is expensive because of an inhospitable climate, unfavorable topography, low population densities, or a lack of proximity to global markets, many technologies from abroad will not arrive quickly through foreign investments or outsourcing. Compare Bolivia and Vietnam in the 1990s, both places I experienced firsthand as an economic adviser. Bolivians enjoyed greater political and civil rights than the Vietnamese did, as measured by Freedom House, yet Bolivia’s economy grew slowly whereas Vietnam’s attracted foreign investment like a magnet. It is easy to see why: Bolivia is a landlocked mountainous country with much of its territory lying higher than 10,000 feet above sea level, whereas Vietnam has a vast coastline with deep-water ports conveniently located near Asia’s booming industrial economies. Vietnam, not Bolivia, was the desirable place to assemble television sets and consumer appliances for Japanese and South Korean companies.
I agree. Furthermore, I strongly believe that "inclusive" political institutions - which protect individual rights, secure property rights, foster entrepreneurship and thereby promote inclusive economic institutions - do not guarantee higher incomes and improved human welfare forever. The increasingly unsustainable trend of widening inequality, decreased income mobility, and concentration of wealth and political power in the US - an exemplar of inclusive political institutions - would appear to weaken their hypothesis.

This is no Marxian argument. As I have blogged here, here and here, there is an inexorable dynamic to modern capitalism (as is practiced and promoted world-wide), even with all its inclusive political institutions, that makes elite capture of the economic and political institutions inevitable. Even when those at the lower part of the wealth ladder experience income growth (and this is itself debatable), the disproportionately higher rate of income growth at the top of the ladder makes concentration of wealth and political power a near certainty.

At the other extreme, in India, again despite relatively robust and inclusive political institutions, poverty and underdevelopment has remained persistently high for more than half a century. Inclusive institutions which protect individual and property rights have not translated to the expected economic growth. Clearly, there is something more to the story of "making development happen" or "sustaining growth" that goes beyond "inclusive" political institutions.

In both cases, other ingredients or conditions, which are essential to the effective functioning of these inclusive institutions have declined (as with the US) or not taken strong enough roots (in case of India). In other words, "inclusive" institutions cannot sustain by themselves nor are they adequate to generate high growth rates. Alternatively (and may be simultaneously), Governments have not been able to effectively mitigate market failures. 

However, I am inclined to largely agree with their converse argument that "extractive" political institutions - which place power in the hands of a few and beget extractive economic institutions, which feature unfair regulations and high barriers to entry into markets - inhibit sustainable economic progress.

In any case, there is something amiss about the disproportionate focus on "inclusive institutions", to the near exclusion of all else, in "Why Nations Fail". The search for that magic pill which can explain economic development and national economic growth has a long history of failures. Despite their hugely impressive scholarship, Acemoglu and Robinson are only the latest set of explorers in this quest.

1 comment:

Srikar said...

Good one, Gulzar. There is perhaps no magic pill at all or universal explanations!