July 26, 2013

Of institutions and political structures

Going by the central idea of Why Nations Fail, we should be optimistic of India’s growth going forward.

ImageThe central idea in James Robinson and Daron Acemoglu’s Why Nations Fail is that the success of a nation is a function of institutions, which are in turn determined by political structures. Through the course of the book, Acemoglu and Robinson give instances from world history to help the reader understand the choices people made at various moments of truth and how over time, minute differences in policy choices led to massive differences in national economies.

One incident that receives great attention is Black Death: the bubonic plague that eliminated half the European population in the 14th century. Eastern and Western Europe reacted differently and this resulted in massive economic differences five centuries hence. In England, there was a peasant revolt. Though the revolt was put down, the message had been delivered and shortly serfdom was abolished. Competition led to massive increase in wages and living standards of peasants. Most of Western Europe underwent a similar change.

In Eastern Europe, however, the aristocracy moved faster than the peasants. Anticipating unrest following the shortage of labour, they went ahead to clamp down further on peasants’ rights, and these countries continued to be in the dark ages till the early 20thcentury when the world wars bankrupted their monarchies, which were overthrown by communist revolutions.

This book has remarkable parallels with another book – The Dictator’s Handbook by Bruce Bueno de Mesquita and Alastair Smith – in arguing that the primary objective of people in power is to remain in power. ‘Development’ and ‘welfare’ are carried out only when they become a necessary condition for remaining in power. Thus, Acemoglu and Robinson argue that nations with “large coalitions” (where support of more people is necessary to remain in power) do much more for the people than those with “small coalitions” (such as monarchies).

This is because large coalitions are more conducive to “creative destruction”. Every change – technological or political – creates its own set of winners and losers. In an authoritarian environment, any change that disturbs the authority of the autocrats is shot down.  And without potentially disruptive innovation, economic growth is very hard to achieve. The authors use this reasoning to argue towards the end of the book that the current rapid economic growth in China, with an authoritarian government at the helm, is unsustainable.

The book gives the example of William Lee, who in the late sixteenth century, applied for a patent for a “knitting machine”. The patent was turned down by Elizabeth I on the grounds that it would lead to massive unemployment. Absolute rulers fear unemployment, for it can lead to political instability. By the 18th century, however, the tables had turned. The Glorious Revolution of 1688 had established the supremacy of parliament, and though the voting population was still small, instruments such as petitions let the common people be heard in the Parliament. Thus, in the 18th century, when people such as Richard Arkwright, James Hargraves or James Watt applied for patents, the Parliament granted them, thus ushering the Industrial Revolution.

While the authors maintain that authoritarian governments lead to stunted economic growth, they are not in favour of anarchy either. Failure of states such as Somalia, Afghanistan or Nepal, they argue, is a function of these countries having never been politically united. It is a similar story with most of sub-Saharan Africa. A certain degree of centralisation, and size of government, is necessary for sustained development.

This book is not without its critics, though.The authors dedicate a chapter towards the beginning of the book dismissing competing theories. This includes the hypothesis that temperate countries tend to be richer than tropical ones, or that Eurasia developed faster than Africa or the Americas due to its dominant East-West Axis (postulated by Jared Diamond in Guns, Germs and Steel). They also debunk ‘cultural’ hypotheses, such as the superiority of the Protestant work ethic or Confucian values.

The authors are extremely critical of communist dictatorships (again – creative destruction is not possible in a communist environment), and instead eulogise the Western ideals of plural democracy and free markets. While the book is well argued, describing short term policy decisions as a factor that has far reaching impact on long term growth, it can invite criticism in the form of failing to the oldest mistake in pubic policy– that correlation implies causation.

Finally, what lessons does this book have for India? While India receives very little mention in this book (there is only the small mention of the East India Company taking over the extractive institutions of Bengal and making them more extractive), we can postulate based on the ideas given in the rest of the book why India is today the way it is. What sets India apart from its peers that gained independence around the same time is that India has steadfastly been a plural democracy. This book can explain why that happened.

While the British Raj performed the useful task of eliminating the power of the incumbent aristocracy, one must not underestimate the impact of either the pre-independence Indian National Congress or elections to Provincial Legislatures. What these institutions created was a new cadre of national leaders who owed their power to their popular appeal, rather than inheritance. Thus, they were in position to take over the administration after the British exit, and were able to put India on a continued path to democracy.

Going by the central idea of the book, we should be optimistic of India’s growth going forward. We seem to have the necessary ingredients for sustained economic growth – parliamentary democracy and institutions such as an independent judiciary. It is now up to us to regulate ourselves in a manner that encourages creative destruction so that we can sustain our economic growth.

Why Nations Fail: The Origins of Power, Prosperity and Poverty
by Daron Acemoglu and James A Robinson
545 pages
Profile Books

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