Russ Roberts

Acemoglu on Why Nations Fail

EconTalk Episode with Daron Acemoglu
Hosted by Russ Roberts
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Daron Acemoglu of MIT and author (with James Robinson) of Why Nations Fail talks with EconTalk host Russ Roberts about the ideas in his book: why some nations fail and others succeed, why some nations grow over time and sustain that growth, while others grow and then stagnate.  Acemoglu draws on an exceptionally rich set of examples over space and time to argue that differences in institutions--political governance and the inclusiveness of the political and economic system--explain the differences in economics success across nations and over time. Acemoglu also discusses how institutions evolve and the critical role institutional change plays in economic success or failure. Along the way, he explains why previous explanations for national economic success are inadequate. The conversation closes with a discussion of the implications of the arguments for foreign aid and attempts by the wealthy nations to help nations that are poor.

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0:36Intro. [Recording date: March 14, 2012.] Russ: Your book is an unbelievably ambitious and sweeping account of historical economic issues. What are you trying to explain? What are you trying to understand and illuminate with this book? Guest: I think one of the key questions that gets many people into social science is the same one that Adam Smith pulls: The Wealth of Nations, why some countries are poor, why some countries are rich. Two hundred and fifty years or so after Adam Smith wrote the book that shaped economics, the puzzle is deeper. The gaps between rich and poor nations have widened, even though we live in a very integrated world. And we haven't developed a satisfactory and comprehensive answer to what factors are at the root of these differences and why there are such glaring gaps in prosperity across nations. That's the question that we are trying to answer in this book. Russ: There are a number of attempts that have been made to explain it. And of course it's possible there isn't one theory that explains everything. But we, as human beings, seem to be drawn to single-idea theories. Talk about some of the alternative explanations that you reject in the book that have been prominent and used to explain growth and poverty. Guest: I used to say there are as many theories on this as the number of authors who wrote on it, and then I realized that some of them do more than one theory. Russ: That's right. Guest: So, there are a huge number of them. But there are a couple of those that are very influential when you look at the writings of academics or pundits or journalists. One of them that perhaps is the least favorite among academics but still kind of has a presence is the geography hypothesis, that some places are rich because they have a favorable climate or-- Russ: Natural resources-- Guest: Yeah, good natural resources. And so on. And I think the evidence doesn't support that. There's a very interesting thesis that Jared Diamond's Guns, Germs, and Steel sort of formulated, which is that really the geographic factors determined where early civilizations blossomed, and that, almost in a deterministic way, shaped which societies are more developed today. And we go in detail about why we sort of disagree with the thesis and why it's not really capable of explaining the patterns of what we see around us today; but they are interesting sort of variants of this. But the one that I think is more kind of popular among journalists and academics is a sort of cultural hypothesis. Max Weber was the person who developed the most famous example of this, or the Protestant ethic and constructive process; and Catholics. That's not as popular perhaps today. But if you sort of ask people why China is doing so well: Well, it is about Chinese culture. Why the Mexicans aren't doing so well or why sub-Saharan Africa is poor: It's all about national cultures or some cultural traits shared by a variety of individuals; or it would be Muslim versus non-Muslim. And again, we try to explain why such explanations are very limited. China has had the same Chinese culture but it did extremely badly under Mao-- Russ: For a few centuries-- Guest: Sorry? Russ: They did extremely badly for a few centuries. Guest: Yes, but even more recently, they did extremely badly 40 years ago when they had terrible incentives under Mao, and suddenly started doing well when the incentives changed. And all the while the same people in Hong Kong were doing very well. That should tell you something. But the one I think is most popular among perhaps the listeners to this podcast, or more broadly among economists, is what we call in the book the Ignorance Hypothesis. And we are sort of naturally drawn to that as academics because our business is to think of good policies and judge which policies are bad, and so we think that that's really important. Many of us--not me--but many of us do advise governments so we think that the advice that governments get is really important. So, if only Greece listened to the right advice, or if only Ireland did the right policy, or the U.S. President had the right policy. Russ: There's something to that. Guest: Yes. Obviously we, as economists, know, can analyze policy better; there's good policy and there's bad policy. But what we try to articulate in the book is when you look at the policies and choices that are most consequential for economic development, they don't get it wrong by mistake. They get it wrong by design. It's not that people don't know what's good or what's bad, but just like Mugabe choosing policies that would destroy the economy with 100,000% inflation, and total chaotic land grabs--they are not about achieving prosperity for the nation. They are either clinging to power at any cost or enriching a specific group of people, including themselves, at the expense of the rest of society. So, that's the sense in which we say they get it wrong not by mistake, not by ignorance, but by design.
6:24Russ: How would you categorize the arguments where people say--and we're going to come to your explanation in a second--well, we know what causes prosperity: it's the rule of law, private property, incentives with decentralized price system; and yet often when those "solutions" are put in place where they had not been before, nations don't prosper. Eastern Europe, Russia, being an obvious example. Now, two possibilities: One is that they didn't implement the policy; and the second is something else was missing. Where do you come down on that debate? Guest: Actually, I think it would be useful to come to our explanation. In answering that question I think we'll come to it in your next question. Russ: Go for it. Guest: Our explanation is that these things are really important: prosperity is created by incentives, and incentives are created by institutions. So, private property is very important, markets are very important, freedom to trade is very important. But, our explanation really sort of departs perhaps from some of the versions of the stories. These things don't exist in a vacuum. They need to be also supported by political institutions; and they need to be effective. So, what happens is if you take a society that's dysfunctional, say, for example, Russia, and on top of it you just foist a privatization scheme because that's going to take you closer to-- Russ: prosperity-- Guest: to a market economy, what you are doing is you are taking an entire ill-distributed system of political power and then you are just giving people one more ability to grab assets. And what you get is not a market allocation, where assets go to the people with the best use and people can sell it and buy and sell in whatever way they want; but the people who are politically connected are able to grab these very useful state assets very cheap. And you end up with millions of oligarchs. So, I think that's a good parable for how our view differs from--just worry about markets being open and don't worry about anything else. You really need to worry about the political system and the social context in which those markets are situated. Russ: So, I think that's undeniably true. It reminds me of a podcast with Diane Ravitch; we were talking about educational reform, and she's very critical of attempts to introduce business models or incentives in education. And I came to the realization that it's not dissimilar from these issues in development, where what appears to be a good solution, incentives, if it doesn't have the embedded other pieces that emerge naturally with institutions, the incentives don't work very well. Or worse, they end up being perverse. Guest: Right, exactly. Russ: I'm thinking about Enron or California's attempt to create an energy market, which was highly--it really wasn't anything like a market except that it had prices. So it's like a market but it didn't have all the other parts of a market that matter. Guest: Yes. I think the problem is two-fold, and I think that's very important. One is that it's not going to work--for exactly the same reasons as the Russian one didn't. Because you introduce market, supposedly--prices--but in the end that's just a facade. Still in the background power is so unequally distributed, the connections matter so much, that people are going to make the allocations not on the basis of those prices but on the basis of who actually has the information about which state assets are being sold for cheap and can shut out other competitors. And so on. The second thing is that you may even get it to work momentarily. You may be able to have a market economy foisted upon a system in which political power is extremely unequally distributed and is in the hands of a small minority; but then at some point they are going to have the incentives and say: Why don't we start playing around with the market incentives so we actually are benefited ourselves? Why don't we start putting entry barriers so that people don't compete against us; why don't we start grabbing some of the assets that people have now built with these market incentives. And once the realization of that possibility comes, of course the entire incentive system implied by the markets and property rights are going to collapse because of the political system is going to interfere.
11:22Russ: To give the listeners a little bit of the feel for the analysis, talk about Nogales, Arizona and its Mexican counterpart and how--it's only one data point of course, but it illustrates why other explanations are not so satisfying and how your explanation has a chance of being a better explanation. Guest: I think it's a very simple example, and you can find several others. When you compare two societies at two different ends of the world, there are so many things that differ; and if somebody wants to say, no, it's not really the incentives, not really the institutions, but it's the culture or the geography, one can--it's very difficult to argue against it in a conclusive manner. But if you look at a society that's ethnically, culturally, geographically very homogeneous but you divide it through a border and you set different sets of laws and incentives on one side than another, then you have something that's almost like a natural experiment. You can see how two different parts that are otherwise similar are performing under institutions. South Korea versus North Korea, Nogales, AZ versus Nogales, Sonora are examples that we can come up with. And you can see, you cross the border and you suddenly enter into a very dilapidated part, much lower levels of income, people are not in school, they have low health, buildings are in worse situation; and north of the border it's entirely different. Because one part is part of the U.S. institutions and benefits from all of those incentives and businesses from the rest of the United States. And south it's much less. Russ: And the counterpoint to that would be--again going back to the stupidity explanation--well, they have bad policies in Mexico, they have bad policies in North Korea. I really like your point--we touched on this in a podcast with Bruce Bueno de Mesquita as well. It's not so much that they don't know what the best policies are. It's that they can't get there from here. They've got certain public choice and institutional barriers which don't, to the outsider, especially to the international economist who looks over and says: Oh, this is easy to fix; we'll just do x, y, and z. Again, in those contexts, North Korea and Mexico--why don't better policies help those people? Why can't they get there from here? Guest: I would say our theory has three parts. One part is about how institutions and through them the incentives are central. These comparisons, Nogales versus Nogales, North Korea, they are about showing that these institutional factors are important. The second part of the theory is about why are these institutions there in the first place. And there is where we argue it's not stupidity, not ignorance; it's really conflict of interest or people who control power as politicians or as leaders or business leaders or whatever of the country, are having their preferred policies imposed on society, even if it's not good for society. And the third part is about how is it that those institutions change over time and why some societies have ended up with one set of institutions versus another. So, in some sense the Nogales comparison is all about showing it's about institutions; but to argue that it's really not stupidity but more structural factors, we need to look at other historical episodes. But I think this case is very clear when you look at it. It's very difficult to make the case that the reason why Liberia did so badly under Charles Taylor or Zimbabwe is doing so badly under Mugabe or the Democratic Republic of the Congo--or Zaire as it was then called--under Mobutu has very little to do with these leaders not knowing that was good or not being able somehow to get the right advice. It had everything to do with the fact that these were very rapacious leaders; they were just interested in their own power and enriching themselves, which they have all done with great aplomb. And they were able to do so and at the expense of the rest of society. Sure, the contrast when you look at Greece versus, I don't know, Austria, is not as stark as when you compare Zimbabwe to Botswana; but it's still there. It's hard to make the case that Greek leaders for the last 20 years were just uninformed about what was good for the economy or somehow unable to get the right advice. But there was a lot of corruption; they didn't want to do the hard choices; they wanted to benefit from the transfers coming from the European Union, which painting a rosy picture to the population; and they were able to get people to go along with it. Russ: So, the obvious challenge to that, and you deal with it in the book, but I want to let you give the answer, is: Well, if you are exploiting your people--and the phrase you use is "extractive"--if you are extracting resources from the rest of the country for you and your friends, you'd think you'd rather have a bigger pie to take your share from than a smaller pie. So at one level there's a puzzle as to why these autocrats, who care only about themselves, and no one is naive about that--why don't they just pass good economic policies and take more? Guest: I think that's a great question, an actual question that economists have asked. And I think the wrong answer that some economists developed in the past is to say: Well, institutions will gravitate toward being efficient because you can always separate maximizing the size of the pie from its distribution, and nobody would turn down something that would increase the size of the pie. And the reason that's not the right answer is because resources, the distribution of the pie, the sharing of the pie, is not separable from what its size is. And we classify the reasons for that into two in the book: we call them economic losers and political losers. Economic losers is actually an idea that's very familiar to economists, and I think a lot of people will sympathize with that, which is that many times the things that increase the size of the pie will come with a sort of Schumpeterian creative destruction. New people will come in with new ideas and replace the rents of monopolists, or the earnings of workers who have specific skill for the old technologies; and we know that happens all the time. But we argue in the book that even the more important problem is what we call political losers; and by that what we mean is that many times the changes that will make the pie bigger also change the distribution of political power. And the distribution of political power is actually even more primitive. Because after all, if all you had to do was keep your power and then some new technology comes, you can always try to use your political power to get some of the rent. But the real tragic thing if you are a leader that is just interested in your own bottom line, is that the changes are also going to unseat you. And that's what the political losers are about, and what we try to show through historical example is that many of the fundamental transformative technologies and many of the institutional changes that unleash economic growth throughout history have come together with changes that weaken the political power of rulers. And that's why they've been resisted by rulers.
19:52Russ: I just want to mention to listeners--there's no way in a one-hour conversation that we can do justice to the scope and breadth of this book. It's a little short of 500 pages, but the historical richness of it is quite extraordinary. It spans time and place in an incredibly ambitious way, and in a very informative way. Guest: Some would say too ambitious. Russ: That's true. That's one of the challenges of a theory of everything--that you are trying to make everything fall in there, or at least a large number of things, and so I'm sure there are people who quibble or complain a lot about any one particular example. But I think the success of the book is the volume of those examples and the richness with which you discuss them. Let me ask you a question along the way. The book is called Why Nations Fail. I'm curious why you called it that instead of "Why Nations Succeed." Any particular answer there? Guest: Yeah; it's a very boring and bad answer, because "Why Nations Succeed" doesn't sound as good. Russ: Succeed is not as attractive in its cadence. Guest: Why Nations Fail has this sort of a single-wordish feeling. The right title is: Why Some Nations Fail and Others Succeed. But that's just a mouthful. Russ: Or: An Inquiry Into the Nature and Causes of the Wealth of Nations. Guest: Somebody had taken that one. Russ: Of course, you can't copyright a title, but it's awkward I think to take a title from someone else. Guest: And a little pretentious, I would say. Russ: But that's Adam Smith's--that's the full title of Smith's book The Wealth of Nations. Guest: Just like someone in macro writing today a book called The General Theory. A little pretentious. Russ: So, how do you see your work relating to Smith? Because there are certain overlaps. Guest: He's a beacon. So, I think Smith, much more than anybody else, had it right. He had a lot of things right. But what he didn't do is that he sort of didn't go to the political level. He really understood how incentives work, he really understood the role of economic institutions. So, essentially what we describe as inclusive [?] economic institutions versus extractive economic institutions is more or less what Smith describes. Of course, there have been changes since then. We put more emphasis on innovation, the power of innovation to transform. Russ: There's been a lot more. Guest: Yeah, we've seen much more of that. Things like equal access to education so that people can depart [?] of the modern technology, that doesn't feature as much in Smith because the times were different. But there are remarkable parallels. But what Smith sort of doesn't engage so much with is: How is it that you make this type of economic institutions stick and emerge? And that's where our notions of inclusive and extractive political institutions come in. That's where we sort of build on Smith and expand on him. Not that he was unaware of it. He has a famous passage from another work, from a letter, I think: In peace, easy taxes and a tolerable administration of justice--as sort of the three factors underlying it and you can sort of recognize them as political factors at some level. But that's not where he goes. The other person on whom we build very heavily is Douglass North; and did put a lot of emphasis on both political and economic institutions. But we sort of go further, I think, than Doug North, and try to understand why some institutions emerge in some places and the interplay between economic and some political institutions. Russ: To be fair to North, his work with Weingast and Wallace--we did a podcast with Barry Weingast on this-- Guest: Fantastic stuff-- Russ: They emphasize open and closed orders where people have access to political and economic power. It's not too dissimilar to your pluralism. Guest: No.
24:02Russ: Give a little, flesh out a little bit more, your view of government as a healthy institution, because I don't want readers to misunderstand your thesis. You believe that a strong government is crucial, but not too strong. Guest: You need to have a government that's strong enough to impose law and order , regulate things it needs to regulate. But at the same time, the government needs to be, a). checked--that's the same idea, goes to our Founding Fathers, checks and balances, restraints on power; but also it needs to be responsive to a broad cross-section of society. In other words, what we call in the book, pluralism. Or a different way of putting it, there needs to be a broad political equality in society. So, you won't get good political institutions from which inclusive economic institutions will follow if political power is concentrated in the hands of a narrow group, be they unions, the businessmen, landowners, an ethnic minority-- Russ: the military-- Guest: that's not going to be conducive. You need everybody to have a political voice. And that political competition will sort of rule out policies and choices that will enrich one group at the expense of the rest. Russ: Now let's take some specific examples. Many of them are quite fascinating, and we can't get into all of them. Let's start with the Black Death. Not many times I get to say in a podcast, "Let's start with the Black Death." One of the things that you are interested in is the evolution of institutions. It's not enough just to say these guys had good institutions, these guys had bad. You talk a lot about critical junctures and some path-dependency throughout history. Why was the Black Death, which was a nasty plague that swept through Europe--what did it do to the institutions? Guest: I think, taking a step backwards, I said we talk about the three pillars of our theory, the role of institutions, why bad institutions emerge and stick around, why these extractive institutions are not mistakes but are by design; and then the third is how they actually change. Where we put the emphasis on how they change is the same sort of conflicts that are inherent and lead to extractive institutions sort of emerging and persisting also mean that there will be people who try to bring down those extractive institutions. There will be those who bring them down so they can build their own extractive institutions, or sometimes people will try to sort of get themselves out from under those institutions, to get some relief from the extractions. And many of these conflictual periods sort of come to a head during periods of what we call critical junctures--if you want to think of it as social and political disequilibrium period, when a shock hits and the existing balance is disrupted. And at those points, these existing paths of institutions will interact at these critical junctures, leading to a divergence. Because in some places the conflict will resolve in one way and in other places in another way. So, the Black Death is one of the examples that we start off things to illustrate how this works--a huge plague that really ravaged the population of Asia and Europe, but mostly we focus on Europe. And really shook the foundations of the existing feudal regime. What happened when the Black Death hit, of course there were millions of people, up to perhaps a third or more than a third of the population of many parts of Europe perished. But it also changed the economic landscape in a major way. So, Europe was in a manorial system based on servile labor at the time; and many of these people died, both in the countryside and in the cities. So, through the usual economic channels, the demand for labor increased. There was much more land per worker and much more work in the urban areas for a worker to do as a result of the decline in population. Russ: The supply of labor decreased. Guest: The supply of labor diminished big time. So, now this created two opposing forces. One of them is that the elites, who were the masters of this servile labor, now they had an interest in extracting even more surplus out of the labor, because the marginal product of the labor was higher. If there was a free labor market, wages would have increased because supply went down, as you just said. So, now if wages are high, I can take even more of that. But against that, once labor became more scarce, political power increased. More pull from urban areas; you could bargain with your employer because your employer was really dependent on you--you were the only employee that he had. And other feudal lords or cities were trying to attract as many laborers as possible. Now, which of these two opposing forces are going to come out dominant? Well, that depended on the political path and the social/economic path that they've taken. And the contrast that we give is between Western Europe, England, and Eastern Europe. What happened in Western Europe was that the cities were strong enough and there were already protections for peasants for a variety of reasons and because of some of the peasant uprisings, that actually the workers were able to sort of get the better hand. And many of them actually gained their independence and reductions in the dues that they had to pay to their lords and so on. Whereas what happened in Eastern Europe was that actually this was a prelude to the second serfdom, where the obligations of the serfs became even more onerous. So that's sort of the illustration of the critical juncture and how it plays out; but of course its implications for the development of Europe were major because that was the collapse of the feudal regime, and the market economy started building as all of these labor obligations and bonded labor started leaving the scene in places like England, France, and so on.
31:19Russ: I'm going to ask you a very complicated two-part question. You answered one question that's bothered me as an amateur historian: there was a point in history--this was probably 1500s, shortly after the Black Death--where there were three dominant, very successful countries in Europe. And high standards of living for at least a small part of the population. Differed by country, of course, in how much it was spread. But England, Spain, and Holland--the Netherlands--were all very successful at this point. Or at least had shown a lot of growth. They had done a lot better than they had before that. We go forward a few hundred years later--and Deirdre McCloskey has a very interesting argument--it's also very ambitious--that this was a cultural change. I'll let you throw in a critique of that if you like it. A certain tolerance for commercial life became apparent at that point, or emerged, and that allowed some of these countries to succeed. Particularly in the Netherlands and in England. And this became eventually the Industrial Revolution, and yet England dominates over that time period, and Spain fades away as an international power, national economic force. And Holland becomes a much sleepier place. How do we explain that very broad procession of history, and in particular, you focus on why the Industrial Revolution had its home in England. I'll give you 90 seconds. No, you could have a little more time. Obviously we could spend two hours just on that, but take a stab. Guest: Right. I'm going to give a very short answer. Russ: It's in the book; folks, if you want to read the book-- Guest: That's the 90-second answer. But I think the answer is very instructive. Spain is benefiting a lot from the New World trade. But look at who is benefiting from the New World trade. It's the Crown. Actually the Crown is getting stronger in Spain. The Parliament, Cortez is never called because the Crown is so powerful. Whereas in England, the gains from Atlantic trade, because of the way that the English monarchy had previously bargained with Parliament and passed laws, is not the monopoly of the Crown. And so it enriches many of the groups that are most opposed to the Crown. And they want their independence. And as a result, the same process that is leading to enrichment but political closing down in Spain is leading to a series of institutional changes that bring constitutional monarchy and the beginning of what we call inclusive institutions in England. And it is--those inclusive institutions are sort of enshrined in the aftermath of the Glorious Revolution of 1688 and 1689, that really are directly leading to the changes in incentives and changes in market structure that underpin the Industrial Revolution that starts 50 years ahead. I think it's very difficult to see how culture is such a driver here. A lot of the cultural factors are developing slowly over time. In Europe there's a lot of shared culture, actually, at that time. If you think of Enlightenment, for example, Enlightenment doesn't start in England, doesn't start in Scotland; the Dutch Enlightenment is perhaps the most path-breaking here, followed by the French. Those are all important factors, but those are not the things that really make people throw themselves into finding innovations and spinning and weaving technologies, and mental energy, and engines that really transformed the British and English economy. Russ: I'll let Deirdre defend herself another time on the program, but I think what's striking in your treatment of this is when you catalog some of the incredible innovations that take place in England. And many of them do take place in England. Of course, you could be cherry-picking the data; I don't think you are. I think the dominant, and I think there's a consensus on this, that the dominant innovations did come from England. If I remember correctly you argue that they came from England because they had an incentive to find them. And everybody else had less of an incentive. Guest: And some of them actually came from people who emigrated to England from other places. They did so because the same innovations would not have been rewarded--in fact would have been punished in other parts of the world. So, we give the example of Puffin, for example, who also made very important advances in the steam engine. But his innovations would not have been allowed, and he was trying to emigrate to England because he thought: That's the only place where I can actually make these things true. He died before he could do that.
36:36Russ: So, to push the mix of geography and culture just for a second, and let you respond to it. One of the things that's striking about your book--I remember as a young person, I don't remember how old I was, but I read The Conquest of Peru, by Prescott, which I think has uncertain historical accuracy. But it's an utterly fascinating book. May be a work of mostly fiction. But it's fascinating, about this clash between the native people of Peru and the Conquistadors coming from Spain. And what your book lays bare in a very brutal and important way is how badly--badly doesn't do justice to it--how brutally many of the colonizers treated the native people. Guest: Absolutely. Russ: You give the example of the Dutch in the East Indies not just subjugating the population, not forcing the patriation, but just murdering an enormous portion of them and leaving a few behind to help exploit the natural resources. In the case of the Spanish in Latin America, in South America, just a brutal serfdom and slavery and extractive relationship. And then you contrast it with the British relationship in North America, and you are going to use that of course to understand the evolution of those two parts of the world; North versus South America turn out very differently decades and then centuries later. And you mention that, well, when the British got to Jamestown, they weren't able to subjugate the native population and they had to actually get along, and eventually trade. Obviously there was a lot of exploitation and cruelty to the native American population, ultimately. But in the early days it was nothing like what was happening in Latin America. And similarly in the case of the Black Death, the political response is that the Crown in England, how they responded to these labor issues and were forced by competition in these market forces to share wealth and share power, didn't happen in Spain. It does cross one's mind that maybe there's something unusual about Britain and the English. Guest: I think that's a very natural thing in people's thoughts. Adam Smith also, Adam Smith on British colonies was very different. Churchill wrote volumes on the history of the English-speaking people. Russ: Well, they would. They are biased. Guest: But it's not true. It's not true. And that's what we try to sort of explain. If you look at the history of the Jamestown colony, it's remarkable that the people who were the governors and the captains of the Virginia colony, their model of colonialization was identical to that of Pissarro and Cortez and all of the Conquistadors who went to the East. They wanted to subjugate local populations and get food and gold from them. They couldn't do that because there were no such populations to subjugate. There was no gold, nothing to grab. Once they couldn't do that, they said: Okay, fine, let's not subjugate that population; let's bring our own sort of serfs from Europe. So bring people who were poor enough to sell themselves into indentured servitude, and they'll be the lower class and we'll be the upper class. They called them under different names, like [?] in Maryland. And that was going to be a very two-class society, very textbook extractive institutions. That didn't work either. So, it wasn't out of the goodness of their heart, but because once these people came in, because the environment was so different that there was the open frontier, you couldn't coerce them to stay. They could go and try to find their own plot of land. They made an about-face and they said: Okay, fine, now this doesn't work; we'll give you economic incentives. And then economic incentives were insufficient because these were the same people who were first trying to subjugate you at the [?]'s edge, and they said: Okay, fine, if you don't believe the economic incentives we'll also give you political incentives. We'll also let you have a general assembly, so that from now on you will be the rulers of this land. And that's when sort of the very different institutional paths that later became the United States started.
41:11Russ: I just was puzzled why the British were unable to enslave the native population. Did they not send enough people? Guest: Oh, there wasn't enough native population. Russ: Oh, you think it was sparse. Guest: The power really draw there, was that in the same way the Spanish were not able to enslave the native population when they went to what is today Buenos Aires. They went there; the people countered; they were the Charruas and the Guarani [?], and these people were very hunter-gatherers, very sparsely settled, just like the native Americans in North America. And the Spanish couldn't enslave those either. But the Spanish could go out to other parts where there were hierarchical, more densely-settled civilizations that they could enslave and subjugate. But the Americans, the British, didn't have that. And the British didn't have that precisely because they were latecomers to the game of colonialism. Russ: They got the worst-- Guest: You know, the Spaniards didn't want North America. North America wasn't the prize colony. Russ: Well, that's because they didn't get the taxes and find all that oil. But your basic point is obviously correct, that the gold and silver of South America was an incredibly seductive draw for Spain. Tell me if this is accurate: One way to describe the difference between the British experience in North America and the Spanish experience in South America is that in North America it was much easier for the Indians to run away. Whereas in South America a lot of them had big, large population centers. Guest: Exactly. But again, it's not because of the Spanish versus the British, the South versus the North. The same thing happened exactly to the Spanish Conquistadors when they tried to colonize the area around Buenos Aires and Uruguay. The Charruas and the Guaranti [?] ran away. Because they were sparsely settled and they did not have very well-defined, settled hierarchies like the Aztecs or the Incas.
43:22Russ: Shifting gears, Africa and South America are generally quite poor relative to North America. But there are exceptions, which make it interesting. In South America you single out Chile and Argentina; and in Africa you single out Botswana. What went right for those three? Guest: I wouldn't say Argentina, we single out in the same way. Russ: I guess you can't single out Argentina and Chile--I'm not sure you can "single out" two countries. Guest: Sure. But also I think the story for Argentina is very different, and it's a tale of caution as opposed to the Botswana case. Let me say a few words about Botswana and then I'll come back to Argentina. I think Botswana is very interesting. It was one of the poorest countries at the time of independence; no great resources, at the time; very few educated people, no roads, no infrastructure. It would have been on the list of everybody and it was on the list of everybody who didn't make a list, of countries that were going to go nowhere. And then of course it became the fastest-growing country in the world. Why? Well, one factor was that they discovered diamonds. But that's not a factor, because they've been discovered everywhere in Africa, and there's civil war and all sorts of bad things. But the key thing in Botswana--the only country in sub-Saharan Africa to have had this distinction--it has had an unblemished democratic record. What happened was that it was one of the unique places in the colonial world where colonial powers, in this case the British, did not interfere with existing institutions, because they thought this was such a useless place, just a buffer zone, just leave it as it is. There were accidents, the contingent paths of history, that made them do so, which we go into detail about in the book; but through a variety of factors, the pre-colonial institutions in Botswana survived. And then one more lucky thing--the pre-colonial institutions in many places were pretty awful. In Botswana, as these things go, they weren't so bad. They were much more participatory, and there was some nascent amount of pluralism in Botswana. And it was that--they were again lucky perhaps because they had leaders that were not Mugabe and Mobutu. Those pre-colonial tribal institutions became the basis of its democracy; the democracy functioned, people participated; and as a result there weren't strong enough incentives to adopt extractive institutions or plunder the diamond wealth or introduce marketing boards to drive the price of cattle--which was the main thing in Botswana--to zero, as they did in many other sub-Saharan countries. And you see what happens when you give good incentives to a place like that--it just grew. So, I think that's a very instructive case. It shows what makes you distinctive is this ensemble of economic and political institutions. It's not just free markets, but it's the fact that its democracy worked that made it possible, orthodox policies, good macroeonomic policies, free markets, and so on to survive. Now, the Argentina path is very different. It's much more like Russia today. Argentina became very rich despite its extractive institutions because of resources. And that then came back to bite it. If you become very rich because of resources but your institutions are deeply extractive, the moment the resources go away or even before, the conflict is there and people are going to use the institutions for enriching themselves. And the history of Argentina in the 20th century has been coups and counter-coups. And when it has been democratic, it has been the worst kind of democracy. Now, where policies have been extremely populist and presidents who get elected--the elections have still used repression and quite dodgy policies and means to control power.
47:42Russ: Let's talk about the Soviet Union, because you spend quite a bit of time on it. I'm going to disagree with you a little bit on how you interpret it. But give your explanation. You talk about how sometimes countries with extractive political and economic institutions can still grow. Guest: Let me bundle that together with China. We discuss them separately in the book but they are very related, because today people are all enthusiastic about China, the Chinese economic model, the authoritarian growth model, and so on; and our interpretation for China is it's exactly like a version of the Soviet Union. Somewhat different; there are limits to the parallel. But the Soviet Union achieved extractive growth. It used the state power to channel resources from agriculture into industry, and it could do so in a rapid way because agriculture was so unproductive and it had a lot of catch-up growth to do, because technology was so far ahead of where the Soviet Union was. And by the forceful relocation of resources from agriculture to industry it achieved remarkable growth for about 40 years. And we see China to be the same--it's a form of catch-up growth under extractive institutions, and the theory that Jim and I have is that unless China is able to fundamentally change its political institutions as well as strengthen the reforms it has already undertaken in its economic institutions, its growth, just like that of Soviet Russia, will be short-lived. Russ: My issue with that is that I'm not really short what kind of growth they actually had. An alternative explanation is there was a measurement issue, and it's really twofold. One is that when they transferred those folks--and in this case they literally transferred them; it wasn't so much of a market process; a little bit more in China than in the Soviet Union. When people became part of industry rather than agriculture, a lot of the stuff that wasn't being measured, now was measured. Second, a lot of stuff was mismeasured. I read, recently, a phenomenal book called Ivan's War, by Catherine Merridale. She chronicles the daily life of the Soviet soldier in WWII. One of the more interesting things is when the Soviet army reached places like Poland--Poland was the most dramatic one--soldiers couldn't believe the standard of living in Poland. Some of the natives responded to this and said: You should see Belgium. You think Poland's rich? When they get to Germany, they also were shocked at how rich it was, but they got comforted by the fact that, well, of course Germany was rich because they stole everything. They couldn't imagine that Germany could be a productive economy, anything like what they saw, because what they knew in their home life was so miserable. Guest: I think there's some truth to that. Soviet GDP in 1985, 1987, was probably exaggerated because a lot of things were so low-quality. Russ: Or unvalued. They had output, but they attached a number to it that people didn't. Guest: They produced a lot of tax. We put tax in our GDP, so they can put tax in their GDP. Russ: Fair enough. Guest: Their cars were crappy, very crappy, that's for sure. But it wasn't pure measurement. They were the first ones to send a dog into space. They were the first ones to send a man into space. So, they could do certain things by sheer force and coercion. But they couldn't produce a decent car. Russ: And they couldn't produce the right amount of toilet paper, either. Guest: Yeah. Pins. They couldn't produce the right sized pins.
51:41Russ: What are the implications of your approach for foreign aid? There's a big debate; we've had Paul Collier on here, William Easterly. Obviously there's a lot of debate in the literature and the policy space about whether aid works or not. What can we learn from your work about foreign aid? Guest: I think the most important thing is that it's just a secondary debate. It's not the first thing we should be debating about development. Foreign aid cannot be the solution. It's obviously not the source of the ills; it's not the reason why places are less developed. And it cannot be the solution. First of all, how can you have solutions to deep institutional problems from the outside, from thousands of miles away, by people sending money? But more importantly, if you throw money into an unchanged institutional structure, nothing is going to change. We are seeing that in the context of Afghanistan in the United States. The United States has done much more than just sending foreign aid, but it has done it within a given institutional structure; and unless that institutional structure changes or unless you have a strategy for changing it, which just doesn't work in general unless there are some exceptional circumstances, it's not going to work. So if the problems start with the institutions, therefore the solutions have to come to grips with those institutions. And unfortunately there are no silver bullet solutions for changing those institutions. Russ: What do you think about this argument that aid actually is counterproductive because it enhances the power of the extractive authoritarians? Guest: I think there is some of that. If you look at the aid that Mobutu received, obviously counterproductive. On the other hand, in Afghanistan, some of that aid actually went to build school. Russ: I don't know if it helped institutions. Guest: No, it did not help institutions. Russ: Excuse me--I don't know if it helped education, is what I meant to say. I remember a reporter once asked me if I was in favor of sending money abroad to help build schools. I mean, who could be against that? And I said: We can't even figure out how to spend money in our own country to increase education. We're good at spending money on education to help schools, but to actually make kids learn more seems to be a little bit trickier. And to expect to do it from a distance. Guest: There's a little wastage. So, people I trust, when they calculate how much of a dollar actually reaches destinations, it's between $.10 and $.20. But still, I think some parts of the world are so poor--Haiti is so poor--that even if a little bit of it gets wasted--10 cents or 20 cents is not so bad. But who am I closest to if I take Easterly versus Sachs? Of course I'm much closer to Easterly. But I think Bill [Easterly] would also say foreign aid is a source of ill. I would say foreign aid has been a source of ill in some places but in most places it's done a minimal amount of good because it's transferred resources to places that are most in need. But it's not part of the solution. Russ: You said there's not much we can do to shape institutions. Guest: I think there's not a silver bullet we can use. But there are obviously certain things that we can do to be a positive force toward institutions. Russ: What are those? Guest: In Syria, the regime is killing people and trying to help the resistance in one way or another, trying to reduce bloodshed, those are obvious things you can do. In Egypt, we have not been very successful, but the intention was actually good. U.S. and others tried to build civil society organizations, give support to the formation of political parties and pro-democratic governments; and many of them ended up in jail. But those are the kinds of things that we can do. Those are small things. They are not going to be game-changers, but they are certainly--there is every reason for the United States and Europe not to be disengaged with the developing world. But we don't have silver bullets. We cannot change the domestic political economy, political equilibrium with a push of a button.

COMMENTS (16 to date)
Szymon Moldenhawer writes:

To expand on point made by Russ. So call progres by Soviet Union was made with horrendous sacrifices and extensive use of slave labor in period of 1930 - 1940. Gulags at one point employed on 1/5 of labor force and produced 40% of output or more.
Moreover actual wage in Russia if measured in number basic products as meat milk etc per hour dropped after revolution and regained level 1911 in 1987
The technological advance happened only after 1945 when large scale enslavement of german technicians captured by Red army. NKVD(predecessor of KGB) had orders to locate and arest all eningineers and technician involved in "hightech luft waffe indudtries" It gave rise to so called winning of the space race. As german slave labor aged so did advantage of soviet union in space.
Most of "wonders" of soviet technology were inept copies of german invention. The Car moskvitch later Lada were clones of 1930 opel, camera zorka was german laica list goes on.
Since Germany was not yet into IT technology soviets suffered major disadvantage in arms race.
Soviets were thus classic case of asset grabing economy with the predictable ending

Michael G Heller writes:

Acemoglu is a good scholar and he gets a lot of things right about development. He also gets some things wrong. He is wrong about Max Weber for example. Weber regarded cultural explanations of development as unscientific. He was quite scathing about culturalist analysis. Weber practically disowned The Protestant Ethic in the introduction when he said that it treats only one side of the causal chain. It's a minor piece in the Weber corpus. By the way, Weber, as I show, is the origin of the 'open and closed' 'inclusive exclusive' distinction (his theory of closure is fundamental for understanding politics). And I disagree with Acemoglu's despondency about what can be done to improve institutions. In my book I try to explain why the market and law sequence did not work in Russia but why it remains the best message of hope and realistic discontinous change in developing as well as advanced countries. Still, there's been a spate of books since 2009 that basically get things right - my own, NWW (North), McCloskey, Fukuyama, and now Acemoglu & Robinson. Put them all together and there's much more good sense about the big story than there was in the past.

Michael G Heller
Capitalism, Institutions, and Economic Development

Benny A. writes:

Can somebody check to see if the podcast was uploaded correctly? I'm unable to access it on my phone through google listen. Thanks.

[Benny: are you accessing the mp3 file http://files.libertyfund.org/econtalk/y2012/Acemoglunations.mp3 ? I have no problem listening to it, though I admit I'm just accessing it through Firefox. Email me at webmaster@econlib.org if you continue to have a problem.-- Econlib Ed.]

William Bernstein writes:

It works fine on PC and generic mp3 player: right click|save link as, also downloaded automatically fine onto generic podcast receiver. So the mp3 was uploaded successfully.

You'll need someone else to tell you about smart phone access.

Bill

MARK writes:

[Comment removed pending confirmation of email address and for policy violations. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Mark (2) writes:

This is what I'm hearing: (correct me if I'm wrong)

1. Political actors respond to market incentives.

2. Some market "incentives" are good for a nation, but bad for a dictator (and are thus disincentives). This explains why dictators often reject improvements in national growth because the changes would result in a net negative for that dictator's personal growth (often by threatening the balance of power).

3. Nations prosper, and dictatorial regimes dissolve, when economic power is decentralized. This results in a decentralization of political power, and market forces drive the nation to pursue policies that benefit the population as a whole, not just extractive policies of a dictator or aristocracy. (Although the discussion on Eastern and Western Europe seemed to indicate that social and political realities affect this balance as well.)

Or, to boil it down even further, it sounds like he's making the case that overly centralized political power mirrors monopolistic corporations. If so, should we craft parallel solutions to both problems?

What was missing from this discussion were questions about how Acemoglu responds to his critics. I like that Roberts routinely includes what he refers to as "challenges to my biases", and am disappointed when he does a podcast that does not include them. Additionally, under what circumstances would Acemoglu consider his hypothesis disproved?

Sigizmund Moldendick writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment and your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Dmitry writes:

Dear Russ and Daron, thank you for another good podcast.

However, I am dissappointed that you didn't touch on the most interesting question for me - how most of the issues you discussed affect growth in the United States.

For example, on the previous shows about bank frauds and financial crises you said many times that nowadays US bankers manipulate political processes to serve their own interests, exactly analogous to what Daron said about processes in Russia and China. Likewise, it would be very interesting to hear whether you or Daron think that US GDP is exaggerated - it is very hard to carry the point that the financial sector produces as much value as is taken into account when GDP is calculated.

I am very interested in your opinion on these matters Russ. Thank you

Invisible Backhand writes:

I loved the part where he says something good about government that undermines your entire life, and you change the subject to the Black Death.

Then he says something good about democracy in Botswana. I knew you couldn't endorse that. You changed the subject to the soviet union.

Frank writes:

What made England different from other countries was the balance of power between the crown and parliament. Absolute monarchies didn't require, couldn't allow and wouldn't take advantage of innovation "from the many."

Surely any potential New World despot would want to shrug off the yoke from below, but the idea of participatory management gains strength as the benefits from innovations are experienced.

David writes:

Russ;

I don't post comments very often, but I listen to your podcast every week. While it is always enlightening, I've been particularly impressed by the guests you've had over the past couple of months. It takes a great deal of intellectual integrity, not to mention courage, to interview people who -- I assume at any rate -- you have strong disagreements with (Dean Baker comes to mind). I don't think you have ever interviewed Jeff Sachs and, while I'm a fan of Bill Easterly's theories, it might be interesting to listen to Sachs as a counterpoint.

I'm currently reading "The Dictator's Handbook" by Bruce Bueno de Mesquita and Alastair Smith. Much of what Daron Acemoglu said seemed consistent with their overall thesis. Bueno de Mesquita and Smith expand their theories to explore some of the problems with corporate governance. Bruce has been on your show several times, but he might be a good guest to discuss some of the issues raised in Dmitry's comment.

Finally, in response to your question during Charles Calomiris's podcast. I enjoy the podcasts that delve into the fundamentals. I listened to Calomiris's interview several times -- something I rarely if ever do.

Thanks for all your shows. You provide a great service.

David

lloydfour writes:

Not sure I will read Why Nations Fail as it seems to me it is a combination of Easterly and Bueno de Mesquita. This week's read is Models Behaving Badly.

61north writes:

Russ,

Very interesting podcast, but I would have also liked a discussion about how these theories apply to the United States.

You've done several podcasts on the Federal debt and it would seem to me that the continued reliance on debt is an "extractive" activity that threatens the future of the country. One segment of the population is using political tools to take wealth from another segment of the population. Those transfers happen in many directions (young to old, citizens to big business, rich to poor), but all remove capital from where the markets would otherwise allocate it.

Our political systems are relatively participatory, but don't seem to be able to stop the extractive overspending that's occurring. Again, there seem to be some parallels between the USA and the theories in the book.

Jed Trott writes:

Russ,

Thanks for the podcast. It was thought provoking as always. I especially appreciated Mr. Acemoglu's point about why dictators don't/can't maximize the size of the pie. I think that there is a difference between they don't and they can't because some extractive regimes try very hard to make the economy grow and others do not.
The difference between extractive regimes that exist in a competitive international environment versus regimes that exist in a static international environment is a great illustration.
An extractive regime that exists in a static international environment, in which it does not feel threatened by other states, faces only the threat that its coalition of support will not be able to maintain power domestically. A client state such as Castro's Cuba is a relatively good example of this. You can also take a look at a small nation which has no worries about being conquered because a hegemonic nation is maintaining stability in the international system and will not allow aggression. Either way if an extractive regime is relatively confident that it will not be attacked from outside its growth dilemma is between the benefit it gets from growth and the risk that growth will empower those who might wish to overthrow it. This risk benefit analysis is highly skewed because overthrow is catastrophic to the regime while benefits are often material comfort and not directly related to the survival of the regime. Therefore a regime of this type doesn’t want growth because the risk of growth heavily outweighs the benefits.
The Soviet Union is probably the most obvious recent example of an extractive regime that existed in a competitive international environment. Because of the Marxist-Leninist undergirding of the Soviet Union and the expansion that it preached the Soviet Union came into direct opposition with the NATO bloc. This led the USSR to seek growth as a target so that it would be able to compete in military proxy wars, the space race and so on. Its incentives are different fundamentally from a regime that doesn’t worry as much about international competition. It faces two opposing risks: one that it will be overthrown internally and two that it will be overthrown through external means. The mitigation strategies for these two risks are opposite. The strategy for the first is to repress growth and the strategy for the second is to encourage it. The Soviet’s tried to make their economy grow for a long time through central planning and while that managed the risk of internal overthrow it did not lead to the growth that would be necessary to compete with the West. Recognizing that the tight control that kept order in the central planning model did not lead to growth, the Soviet’s tried openness. Unfortunately for them this increased the risk of internal overthrow which was eventually what happened of course.
I have many hidden assumptions in here I know. I think that examining the problem of extractive regimes in the light of international pressures helps to elucidate some of the points that Mr. Acemoglu makes.

Jim Feehely writes:

Hi Russ,

Whilst this discussion was interesting and earnest, it demonstrates why taking a purely economic view omits much of the essential context.

Nations 'fail' dominantly because of the way in which the rich nations (particularly the USA) ensure that 3rd world and developing nations cannot succeed. This is done through agencies like the IMF, so-called free trade agreements and the punishment that is meted out to dissident economies by the faceless power of international finance which is controlled by bankers from the developed nations.

It is the power relationships in the world that dominate the potential for percieved economic success, not laboratory free-market theories that bear no real relation to the facts.

Rodet writes:

Russ:

I always appreciate the podcasts and I learn a lot from scholars in fields other than my own. I must say, I haven't yet read Acemoglu's book, but other than historical examples he and his coauthor provide it sounds to me like they are summarizing theories that have been around for quite some time.

I'm also disappointed that you didn't question the lack of citation of any public choice work. Many of the "new" ideas put forth by Acemoglu and his coauthors as well as Tabellini et al are recycling public choice ideas that stemmed from the Calculus of Consent by Buchanan and Tullock; however, neither these pioneering scholars nor modern scholars in the field ever receive credit by these authors.

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