Why Nations Fail – Chapter 5 Summary

Levisalles Amaury Georg-August-Universitat Sommer Semester 2012 Gottingen

WHY NATIONS FAIL D. ACEMOGLU & J. A. ROBINSON Seminar Paper

CHAPTER 5 “I’VE SEEN THE FUTURE, AND IT WORKS”: GROWTH UNDER EXTRACTIVE INSTITUTIONS

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Resume of the Key Statements of the Chapter In this chapter, D. Acemoglu and J. A. Robinson explain how growth under extractive institutions is not sustainable in the long term and always leads to the collapse, in one way or another, of these institutions. The title of the chapter, “I’ve seen the future and it works”, is a quotation from the autobiography of Lincoln Steffens (1931). He was then speaking about the communist model that he had discovered on a diplomatic mission to Russia. The title of the chapter is of course ironic since it is well known that the Soviet System broke down in 1991.

In this chapter the authors tackle different aspects of Extractive Institutions and explain throughout many concrete examples as to why the multiple facets of these institutions lead to the end of them. Extractive political and economical institutions are “structured to extract resources from the many by the few” and “concentrate power in the hand of a few, who will then have incentives to maintain and develop these institutions” (page 430). Dictatorship is the best example of an extractive institution as in this case power is concentrated in the hands of very few, if not only the dictator himself.

These types of institutions are mostly founded in authoritarianism and totalitarianism political systems (dictatorship being an authoritarianism type of system). The Soviet Model is the first system studied by Acemoglu and Robinson in this chapter. It is indeed one of the best examples in history to observe how growth evolves under extractive institutions and the problems that rise along this type of political and economical system. After coming to power via a massive purge of his opponents, Stalin decided to invest massively in the industry sector through huge government orders, especially in the military and aeronautical sectors.

In order to support all the needs of the workers, he implemented very high taxes on agricultural resources. However, the tax system in Russia at this time was very ineffective. He thus collectivized all the land to form state farms known as Kolkhoz. The incentives of farm workers were therefore much lowered since a large part of their harvests was taken away by the government. This led to a great famine during which six million Russians died (Davies and Wheatcroft, 2004).

Even if the collectivization system was a total disaster, the growth in Russia still increased from 6% per year from 1928 to 1960, which at this time was a record. The growth happened through reallocation of labour and capital force. Indeed, the technology used at this 3 time in the country was really obsolete in comparison to Europe or the United States and only removing resources from agricultural to industrial work allowed Russia to benefit from very high growth for several years. However, rapid growth rate is one, if not the only possible achievement under Extractive Institutions.

In fact, Russia’s extreme growth slowed down from the 1960 and it had totally stopped by 1970. Unsustainable growth is explained by a lack of incentive for creative destruction, that means for technological change. For example, bonuses were given to companies meeting targets set by the government. Therefore, no one was eager to sacrifice resources to invest in future technologies since everyone wanted to reach targets. What is to be considered with the Soviet Model is that growth under Extractive Institutions is high but only in the very short term and that it is not sustainable at all.

The lack of creative destruction and true economic incentives are the main factors responsible for it. The second part of the chapter is focused on how Institutional Innovations, e. g. centralization and political establishment, can accomplish some limited economic achievements, and how, in a certain situation, it led to the Neolithic Revolution. In 1620, a man named Shyaam provoked a political revolution and made himself king of the Bushong, an African people located near the river Kasai. On the other side of the river was another, the Lele.

Contrary to the first one, they had no government and would live in villages without any real hierarchy (Douglas, 1962/1963 and Vansina, 1978). After his accession to power, King Shyaam implemented a pyramid of political institutions and with it, a tax and a legal system assured by a police and a “trial by jury” system. The king also decided to reorganize agriculture with the implementation of “an intensive mixed-farming cycle” (page 135). Thanks to all of this, the Bushong became much more prosperous than their neighbours and the situation is still the same today.

Although King Shyaam was taking a large amount of resources from its people, since it was an Extractive Institution, they were still much richer than their nearby residents and were living in a secure state. As for the Natufians, they were considered as the first people to settle and established the bases for the Neolithic Revolution. Around 9600 BC came “The Long Summer” (Fagan, 2003), which allowed an expanding animal and vegetal population. Thanks to these abundant resources, the Natufians decided to settle down and later on, began farming. This change from a omadic to a sedentary life had been made possible by previous institutional changes.

Even though the reasons are still unknown, it has been proved that a hierarchy had been established 4 among the Natufians. Since their group had a leader, they were able to settle and keep on having institutional innovations that were needed to live in a sedentary way. The important fact about the Bushong and the Natufians is that even with a limited amount of institutional innovation, a certain amount of economic prosperity can be reached. However this development is not very high but more importantly, it is not sustainable.

The fourth and last society studied by Acemoglu and Robinson is the Maya and their City-States that existed about a thousand years ago. The goal of the authors here is to show us that as Extractive Institutions rise, some people take power and are envied by others. This situation can lead to the replacement of a leader by another but also to the end of a civilization, as it has been the case for the Maya. As the Natufians transitioned to Agriculture, so did the Maya. This agricultural emergence was made possible by the creation of Extractive Institutions.

The Maya were in fact an extremely well hierarchically developed society. But since it was controlled by extractive institutions, it meant that a few people would be exploiting a large number and these inequalities always generate jealousy. The city-states were very prosperous and trade was very important at the time, however, lots of them would be at war against one another. And when it wasn’t the cities that were at war, it would be the elites of a city that would fight each other for power. This situation of elite warfare was all the more the case when the king (k’uhul ajaw) of a city would die.

At some point, in the city of Quirigua, when the last king died, the population simply deserted the city and the let it be invaded by the jungle. The main point to be remembered from the Mayan example is that when it is not the economic situation that kills extractive institutions, it is its political system. Because such a model makes lots of people envious, self-destruction by citizens from the same city or war between cities is ineluctable. We can therefore keep in mind that Extractive Institutions are able to achieve more or less high and rapid growth.

However, this growth is unsustainable and sometimes very limited, mainly because of a lack of creative destruction and technological progress. This is mainly due to the resistance opposed by the Elite and the Government that fear these changes. Another feature of extractive institutions is that great inequalities among people arise since the state extracts much of the created wealth. Political instability is the last important aspect of these institutions as the position of elite is much envied by others. 5 Description of the Original Researches used By The Authors

In this second part, we will have a look at the original papers that the authors used to write their book and discuss them. The first case of the chapter, the Soviet Model, is based on three main books and on numbers and a quotation coming from 4 others. We shall here examine mainly the three principal writings used by the authors in their book. The first important paper is written by Joseph S. Berliner and is entitled “The Innovation Decision in Soviet Industry”. In this book, J. Berliner explains the process of innovation under the Soviet Model and how decisions about it are being taken.

He provides an explanation of how the economy under the Communist System works but above all, he focuses on the features that are being taken into account to decide the innovations that are to be implemented. What is to be understood as innovation in the Soviet Union is “whenever any enterprise introduces a product or process that has never been employed before”. As D. Acemoglu and J. A. Robinson point out in their book, the innovation system is more than inefficient. Indeed, the soviet economy is based on “the production of established products by mean of established processes” and therefore, innovation is not very conceivable.

The second text is from Gregory and Harrison and deals with how the economy worked and how it was planned under Stalin’s dictatorship. Following the opening of the economic archives under Stalin’s era, it has been found that the system was extremely centralized. Even if power was delegated, all the decision makers feared repression from their superior in case of a bad choice. In the end, Stalin was making an incredible amount of decisions and everything was controlled from the very top, making the system inaccurate.

We also learn that the communist control over the market, that should have replaced the invisible hand in a market-friendly economy, was totally inefficient. The central planning as Acemoglu and Robinson mention wasn’t able to introduce true incentives because the whole market was built on government command and this is not sustainable in the long term as we saw when the Soviet Union fell. The last document used is a review by Levy and Peart of all the theories that had been made about the Soviet economic growth and how everyone was more or less way too overconfident about it.

Like Samuelson (1948-1980), some Americans economists had predicted that the Soviet Union’s economy was to overpass the United State’s one. Indeed, when we   6 take a look at the consumption of the two countries, their part of investment of the GNP and their growth at the time, we could think that the US economy should have been overtaken by the Soviet’s in a few years. However, the Soviet GNP was at the beginning only 60% of America’s. More importantly, the Soviet investments were focused essentially on the military and the aeronautical sector. Therefore, the communist economy was not diversified at all, that is to say, not sustainable.

For the second part of the chapter, we will have a look over three of the texts used in the studied chapter. As we can read in an abstract of Vansina’s study about the Kuba kingdom, it is impossible to know the exact reasons that led a man to unite the Kuba people under his leadership. But what is sure is that King Shyaam a-Mbul a Ngoong, Shyaam “the Great”, has left an incredible legacy to its people. By creating a political, economical and social life, he simply allowed the Bushong people, one of the Kuba tribe, to have a prosperous and secured life compared to the other tribes.

The reason why it is the Bushong and not the Lele, the Pende or another people that has benefited from these innovations is however unknown since there is no writing about it and the only memories that subsist are through oral histories. As Acemoglu and Robinson have written, Shyaam has revolutionized the culture of its people through the implementation of an agricultural cycle based on cultivating different crops in the course of the year. He also brought to its people a developed government built on justice, merit and loyalty.

It is therefore proved that the institutional innovations led to a great development of the Bushong over the years, even if it was limited because of the Belgian colonization at the end of the 19th century. The second paper is about “The Emergence of Agriculture” and how we know that agriculture was developed after settling and not before. In his paper, Bruce D. Smith explains that agriculture did not appear in one day but in more or less 2 000 years. Indeed, through archaeological researches, it has been proved that the plants cultivated 8 000 years ago were selected and had already been sorted.

As we read in Acemoglu and Robinson’s book, the Natufians had first selected the good crops and had then cultivated them. But in order to select them, the Natufians had to be settled, which proves that agriculture came after settlement. And with the rise of agriculture came other sciences such as math, astronomy or engineering that allowed the farmers to establish a calendar or effective irrigation system. The third book, which also confirms Smith’s work is entitled “Village on the Euphrates: From Foraging to Farming at Abu Hureyra”. In this book, the authors take the village of Abu Hureyra as an example.

This village was inhabited by Natufians from 11 500 B. C to 7 000 B. C and on the   7 archaeological site, scientists have found prior evidence that agriculture came after sedentarisation. Indeed, in the part of the village dating from more than approximately 9 000 years ago, bones of local hunted animals such as Persian gazelles have been found along with crops of wild vegetations. On the contrary, in the part of the village that existed after 9 000 B. C, bones of domesticated animals and plants have been found. This confirms once more the fact that agriculture appeared after settlement.

For the third and last part of the studied chapter, we will take a look at two of the books used. The first one, “Chronicle of the Maya King and Queens: Deciphering the Dynasties of the Ancient Maya”, is a great description of the complex hierarchy that ruled the Mayan empire for several centuries. The book explains the story of all the different dynasties that existed throughout the Mayan empire and how the cities made alliances in order to create kingdoms and then fought between each other in order to control the largest possible part of the Mayan empire.

As we read in Acemoglu and Robinson’s work, the wars between the Maya city-states played a big role in the collapse of its empire. In the second text, “The Fall of the Ancient Maya”, the reasons for the collapse of the Mayan empire are more deeply studied. One of the trigger factors of it was the long-lasting droughts that would sometimes occur for several months and which would severely weaken the populations. Another reason is that the King, who also occupied the function of high priest at the time, was responsible for all the sacrifices that were supposed to bring rain, good harvest and prosperity to the city.

But this wouldn’t always work and as we read in the fifth chapter. In the city of Copan for example, the king was overthrown and later on, the city abandoned. One of the reasons that Copan’s king wasn’t able to provide enough food for all its inhabitants is that the population was growing over time and the farming surface was diminishing. This made it impossible for all the people of Copan to be fed. This situation was not only observed in Copan but all over the Mayan empire. However, what seems to be the main reason for the Mayan collapse is the constant warfare that would occur between cities and even among them.

It was believed, at the time, that the sacrifices that kings had to do to bring rain, food and richness, had to be from royal blood. That means that cities were not only fighting against each other in order to enlarge their kingdoms but also to capture the elites from other cities and ransack them to take all the precious resources and offer them as sacrifices to the gods. Therefore, lots of cities would find themselves without any government and thereafter, the elites would fight against each other to take the throne and the cities would be abandoned in the end. 8

Opposition to the Theories of Acemoglu and Robinson For this third part of the seminar paper, we will use reviews from several writers and newspapers about “Why Nations Fail”. The first one is a review by Francis Fukuyama about the book but more precisely about the notions of extractive institutions and conversely, inclusive institutions. In his article, Fukuyama explains why he disagrees with Acemoglu and Robinson’s theory about the “more inclusive, more growth” phenomenon. He criticizes the fact that Acemoglu and Robinson do not give a precise definition of extractive and inclusive institutions.

Since these two opposed government systems are not well defined, it allows the authors to give the benefit of growth to the inclusive institutions and on the contrary, to blame the extractive institutions for the absence of growth. He puts forward the argument that nowadays, each government is a mix of extractive and inclusive institutions and it is therefore extremely difficult to precisely attribute the wealth or the poorness of a country to one of the two types of politico-economic systems.

He also disapproves of the fact that inclusive institutions are called so as soon as the people are able to have a role in the political life of the country, even if very limited. He takes England in the late 17th Century, as an example. He explains that it is absurd to call it an inclusive state since only 10% of the population could vote at the time. For him, an inclusive institution should be defined as such, if it is like a modern day democracy, among many other things.

He regrets that the Potosi Mita of the Conquistador’s America, the Caribbean’s Sugar Plantation, the Argentinean’s Ranchers and today’s Communist China are all put in the same category. As a counter argument against “more inclusive, more growth”, he takes the example of India today, which is considered as the biggest democratic republic in the world. The problem in India, as Fukuyama writes, is that the inclusive institutions are too inclusive. The problem with it is that the government is unable to make any important decision about “major infrastructure projects because of all the lawsuits and the protests”.

We therefore see that an excess of inclusion makes the inclusive state inaccurate, as is exactly the same case with an extractive institution. With the explanation of the Roman Empire System, Fukuyama shows us an example of a stable politico-economic institution and his disagreement with “Why Nations Fail” 9 concerning extractive institutions. The changeover from an oligarchy to a monarchy brought a political stability to the Roman Empire that enabled it to become one of the biggest nations that ever existed. Furthermore, this change allowed the citizens to take part in political life.

Even though the Roman Empire ultimately collapsed, it was the wealthiest country in the world for more than two centuries. Fukuyama here is sceptical about the global model developed by Acemoglu and Robinson. He thus disagrees that Extractive Institutions are always a source of political and economical instability. In the end, we can say that even if Fukuyama disagrees with a certain number of Acemoglu and Robinson’s arguments, they all agree on the fact that the key to success, and therefore growth, is a mix of inclusive and extractive politics and economics.

The second article that we shall study here is written by Matthew Yglesias. In his review, Yglesias asks himself why it is that some of the biggest differences of income exist between countries in the third world and developed countries. He wonders why citizens from Ethiopia earn ten times less than ones from Colombia where as at the same time, citizens from Colombia earn only four times less than ones from Sweden. According to Yglesias, a “wellexecuted programme of growth under extractive institutions would solve some of the world’s severe problems”.

He explains, in a later article, that Communism is the key to explaining differences of wealth in countries that are governed by extractive institutions. It is for him the reason why East Germany was much poorer than West Germany, China than Taiwan or even North Korea and South Korea. We can therefore say that Yglesias is not in disagreement with Acemoglu and Robinson’s theories but thinks that the comparisons should not occur between extractive and inclusive institutions but between extractive institutions themselves.

The last article we will see is a review by The Economist about the book “Why Nations Fail” and the question of the elites. According to Buttonwood, Extractive Elites exist within inclusive institutions. He says that the financial system is one of them. They are being criticized because they take a considerable amount of resources and therefore prevent these resources being allocated to others sectors in which innovations could be made. As banks are the institutions that lend money to entrepreneurs to create new businesses, they have the power of decision about the creation of start-ups, which is to say, new ideas and innovations.

If banks would lend the money each time, they would be fully considered as inclusive institutions, however, this is not the case. The principal purpose of a bank is to be profitable   10 and make the most amount of money possible. Therefore, they don’t want to lend money each time and are seen in this way as extractive institutions as they will only give the money to concrete and profitable businesses. Another problem of the inclusive institutions is the social policies applied by some countries; employees from the public sector prefer keeping their secure jobs rather than creating or joining a new business.

These employees do not only want to be sure to keep their jobs but also want to continue enjoying the many advantages that civil servants are given. This, in a way, is a form of non-creative destruction, or at least, non-innovation. It is of course a perversity of the social aids created by governments of inclusive institutions. However, it is a form of resistance to creative destruction, which is a core feature of extractive institutions. The Public Sector is therefore, along with the financial Sector, a kind of extractive elite.

However, the article in The Economist explains well that the extraction of the Elite among inclusive institutions is limited and cannot be regarded as totally extractive. 11 Personal Point Of View For the last part of this review of the fifth chapter of “Why Nations Fail”, I will give my thoughts about the points that have been discussed previously in the essay and that are tackled in the chapter. With the first example that Acemoglu and Robinson develop in this chapter, they show us how the lack of innovation is a main feature of Extractive Institutions’ failure.

This lack of innovation is mainly due to the resistance of the Elite and a Government that fears being overthrown by the people, as they will be willing to keep the profits of their innovations. On this point, I totally agree with the argument, however, as we have seen with the Soviet Model, that for more than 30 years they have been able to extract the best of what was available. That is to say that without, or with only very few technological innovations, the Soviet Union has been able to maintain a 6% growth rate per year.

This is somewhat incredible since America, at the same time, could not do better even though they were benefiting from technological change. I think that what is to be learned here is that in general, and even more in today’s world, we do not use what we have to its full capacity. By this I mean that as soon as we create a new tool or a new technology, we get rid of it before having used all of its facets. And the advantage, maybe the only one, of a totalitarianism state is that it obliges the people to work with what they have and therefore, use their tools to the optimum. I don’t want to be taken for an extremist here.

I am not at all in favour of a totalitarian or an authoritarian system; I just think that the best of every system should be taken, as there is something good within each one. In this case, it is the optimum and full use of the present technologies before moving on to other things. As we see with the second example, a certain degree of institutional innovations may bring a certain degree of growth. With the institutional innovations come also economic, social and political improvements. I think that what is to be considered with King Shyaam is that with a certain degree of rigidity, growth is enabled.

Therefore, I would say, following Yglesias’ point of view, that with a certain degree of extraction, when well executed, a certain amount of growth and achievements could be reached. I think that even if in the long term, extractive institutions are not good and viable, it can be a good way to start or to re-launch an 12 economy. Even if this is very difficult to achieve, I think that having extractive institutions at the beginning and then moving on towards more inclusive ones might be very good for the economy of a nation.

As Fukuyama describes with the Roman Empire, the System was clearly extractive since the power was in the hands of the emperor. However, citizens had much more possibility to take part in the political life of their cites and they had true incentives to work since they could make their fortunes, but above all, they could keep these fortunes. They would have to pay taxes but the notion of private property was real and if someone was trying hard to succeed, he could do so.

The result was that the Roman Empire stood for more than 200 years and is considered as one of the biggest that has ever existed. A certain degree of political extraction can therefore definitely be good for a nation’s growth. We can see, today, that the political parties are more often trying to destroy the other parties’ ideas than trying to cooperate with them and find the best compromises. It is here that a certain degree of extractive politics could be good and could help countries take big decisions more quickly.

I would like to finish here with the case of China. Acemoglu and Robinson are convinced that China will inevitably collapse, just like the Soviet Union did. I think that this might not be the case for four reasons. My first point is the difference that exists between China and the former Soviet Union. On the other hqnd, we know much more about China than we knew about USSR. What I mean here is that we know that China has a considerable fortune and that they are not spending money that they don’t have, which was the case with Soviet Union.

There is a much stronger transparency with China’s economy than there was with Stalin’s government. My second argument is that the economical situation from today is not the same at all compared to that of the twentieth century. And we have seen that even with the global economic crisis that occurred in 2008, China has succeeded in maintaining a growth rate of more than 8% and an average growth of 10% over the past three decades, which is much more than USSR even though USSR’s GDP was bigger than China’s today.

My third point is that China is opening its economy more and more; it is gradually moving towards an inclusive economy. China is for technological change and creative destruction. Since approximately a decade, China has opened itself to foreign investments and Shanghai is now sometimes considered as the future “New York”. Even if this economical change is very limited and extremely controlled by the government (any foreign company that wishes to establish itself in China must create a joint venture with a Chinese company),   13 changes are happening.

We cannot therefore say that China is against creative destruction; it is just that it is an authoritarian country and changes cannot happen in one day. My last point is about the political power in China and the liberty of the people. It is, I believe, the only reason that might someday put an end to the Chinese regime. Even if the people who disagree with the Chinese government are very badly treated, they are still much more considerate than before thanks to the international relations that China maintains with other countries.

That is to say, China cares more than before about how other countries view it. However, the People’s Republic of China is still extremely repressing its dissidents. The population in China is step by step, gaining some freedom even if they are still very oppressed by the regime. In the last few years, the situation with Chinese workers has evolved and their wages or working conditions have considerably changed, especially after the suicide wave that touched the country in 2010.

In the end, I would conclude by saying that China, if it succeeds in following its transition little by little to a more inclusive economy and moreover to a more inclusive political system, even if not reaching the point of a democracy, might not collapse as lots of economists are predicting today.

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