by Prosperity;Poverty Why Nations Fail: The Origins of Power
Our theory has attempted to achieve this by operating on two levels. The first is the distinction between extractive and inclusive economic and political institutions. The second is our explanation for why inclusive institutions emerged in some parts of the world and not in others. While the first level of our theory is about an institutional interpretation of history, the second level is about how history has shaped institutional trajectories of nations.
Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy. Similarly, extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.
These tendencies do not imply that extractive economic and political institutions are inconsistent with economic growth. On the contrary, every elite would, all else being equal, like to encourage as much growth as possible in order to have more to extract. Extractive institutions that have achieved at least a minimal degree of political centralization are often able to generate some amount of growth. What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ultimately short lived. Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability.
The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive economic and political institutions. But neither the vicious nor the virtuous circle is absolute. In fact, some nations live under inclusive institutions today because, though extractive institutions have been the norm in history, some societies have been able to break the mold and transition toward inclusive institutions. Our explanation for these transitions is historical, but not historically predetermined. Major institutional change, the requisite for major economic change, takes place as a result of the interaction between existing institutions and critical junctures. Critical junctures are major events that disrupt the existing political and economic balance in one or many societies, such as the Black Death, which killed possibly as much as half the population of most areas in Europe during the fourteenth century; the opening of Atlantic trade routes, which created enormous profit opportunities for many in Western Europe; and the Industrial Revolution, which offered the potential for rapid but also disruptive changes in the structure of economies around the world.
Existing institutional differences among societies themselves are a result of past institutional changes. Why does the path of institutional change differ across societies? The answer to this question lies in institutional drift. In the same way that the genes of two isolated populations of organisms will drift apart slowly because of random mutations in the so-called process of evolutionary or genetic drift, two otherwise similar societies will also drift apart institutionally—albeit, again, slowly. Conflict over income and power, and indirectly over institutions, is a constant in all societies. This conflict often has a contingent outcome, even if the playing field over which it transpires is not level. The outcome of this conflict leads to institutional drift. But this is not necessarily a cumulative process. It does not imply that the small differences that emerge at some point will necessarily become larger over time. On the contrary, as our discussion of Roman Britain in chapter 6 illustrates, small differences open up, and then disappear, and then reappear again. However, when a critical juncture arrives, these small differences that have emerged as a result of institutional drift may be the small differences that matter in leading otherwise quite similar societies to diverge radically.
We saw in chapters 7 and 8 that despite the many similarities between England, France, and Spain, the critical juncture of the Atlantic trade had the most transformative impact on England because of such small differences—the fact that because of developments during the fifteenth and sixteenth centuries, the English Crown could not control all overseas trade, as this trade was mostly under Crown monopoly in France and Spain. As a result, in France and Spain, it was the monarchy and the groups allied with it who were the main beneficiaries of the large profits created by Atlantic trade and colonial expansion, while in England it was groups strongly opposed to the monarchy who gained from economic opportunities thrown open by this critical juncture. Though institutional drift leads to small differences, its interplay with critical junctures leads to institutional divergence, and thus this divergence then creates the now more major institutional differences that the next critical juncture will affect.
History is key, since it is historical processes that, via institutional drift, create the differences that may become consequential during critical junctures. Critical junctures themselves are historical turning points. And the vicious and virtuous circles imply that we have to study history to understand the nature of institutional differences that have been historically structured. Yet our theory does not imply historical determinism—or any other kind of determinism. It is for this reason that the answer to the question we started with in this chapter is no: there was no historical necessity that Peru end up so much poorer than Western Europe or the United States.
To start with, in contrast with the geography and culture hypotheses, Peru is not condemned to poverty because of its geography or culture. In our theory, Peru is so much poorer than Western Europe and the United States today because of its institutions, and to understand the reasons for this, we need to understand the historical process of institutional development in Peru. As we saw in the second chapter, five hundred years ago the Inca Empire, which occupied contemporary Peru, was richer, more technologically sophisticated, and more politically centralized than the smaller polities occupying North America. The turning point was the way in which this area was colonized and how this contrasted with the colonization of North America. This resulted not from a historically predetermined process but as the contingent outcome of several pivotal institutional developments during critical junctures. At least three factors could have changed this trajectory and led to very different long-run patterns.
First, institutional differences within the Americas during the fifteenth century shaped how these areas were colonized. North America followed a different institutional trajectory than Peru because it was sparsely settled before colonization and attracted European settlers who then successfully rose up against the elite whom entities such as the Virginia Company and the English Crown had tried to create. In contrast, Spanish conquistadors found a centralized, extractive state in Peru they could take over and a large population t
hey could put to work in mines and plantations. There was also nothing geographically predetermined about the lay of the land within the Americas at the time the Europeans arrived. In the same way that the emergence of a centralized state led by King Shyaam among the Bushong was a result of a major institutional innovation, or perhaps even of political revolution, as we saw in chapter 5, the Inca civilization in Peru and the large populations in this area resulted from major institutional innovations. These could instead have taken place in North America, in places such as the Mississippi Valley or even the northeastern United States. Had this been the case, Europeans might have encountered empty lands in the Andes and centralized states in North America, and the roles of Peru and the United States could have been reversed. Europeans would then have settled in areas around Peru, and the conflict between the majority of settlers and the elite could have led to the creation of inclusive institutions there instead of in North America. The subsequent paths of economic development would then likely have been different.
Second, the Inca Empire might have resisted European colonialism, as Japan did when Commodore Perry’s ships arrived in Edo Bay. Though the greater extractiveness of the Inca Empire in contrast with Tokugawa, Japan, certainly made a political revolution akin to the Meiji Restoration less likely in Peru, there was no historical necessity that the Inca completely succumb to European domination. If they had been able to resist and even institutionally modernize in response to the threats, the whole path of the history of the New World, and with it the entire history of the world, could have been different.
Third and most radically, it is not even historically or geographically or culturally predetermined that Europeans should have been the ones colonizing the world. It could have been the Chinese or even the Incas. Of course, such an outcome is impossible when we look at the world from the vantage point of the fifteenth century, by which time Western Europe had pulled ahead of the Americas, and China had already turned inward. But Western Europe of the fifteenth century was itself an outcome of a contingent process of institutional drift punctuated by critical junctures, and nothing about it was inevitable. Western European powers could not have surged ahead and conquered the world without several historic turning points. These included the specific path that feudalism took, replacing slavery and weakening the power of monarchs on the way; the fact that the centuries following the turn of the first millennium in Europe witnessed the development of independent and commercially autonomous cities; the fact that European monarchs were not as threatened by, and consequently did not try to discourage, overseas trade as the Chinese emperors did during the Ming dynasty; and the arrival of the Black Death, which shook up the foundations of the feudal order. If these events had transpired differently, we could be living in a very different world today, one in which Peru might be richer than Western Europe or the United States.
NATURALLY, THE PREDICTIVE POWER of a theory where both small differences and contingency play key roles will be limited. Few would have predicted in the fifteenth or even the sixteenth centuries, let alone in the many centuries following the fall of the Roman Empire, that the major breakthrough toward inclusive institutions would happen in Britain. It was only the specific process of institutional drift and the nature of the critical juncture created by the opening of Atlantic trade that made this possible. Neither would many have believed in the midst of the Cultural Revolution during the 1970s that China would soon be on a path toward radical changes in its economic institutions and subsequently on a breakneck growth trajectory. It is similarly impossible to predict with any certainty what the lay of the land will be in five hundred years. Yet these are not shortcomings of our theory. The historical account we have presented so far indicates that any approach based on historical determinism—based on geography, culture, or even other historical factors—is inadequate. Small differences and contingency are not just part of our theory; they are part of the shape of history.
Even if making precise predictions about which societies will prosper relative to others is difficult, we have seen throughout the book that our theory explains the broad differences in the prosperity and poverty of nations around the world fairly well. We will see in the rest of this chapter that it also provides some guidelines as to what types of societies are more likely to achieve economic growth over the next several decades.
First, vicious and virtuous circles generate a lot of persistence and sluggishness. There should be little doubt that in fifty or even a hundred years, the United States and Western Europe, based on their inclusive economic and political institutions, will be richer, most likely considerably richer, than sub-Saharan Africa, the Middle East, Central America, or Southeast Asia. However, within these broad patterns there will be major institutional changes in the next century, with some countries breaking the mold and transitioning from poor to rich.
Nations that have achieved almost no political centralization, such as Somalia and Afghanistan, or those that have undergone a collapse of the state, such as Haiti did over the last several decades—long before the massive earthquake there in 2010 led to the devastation of the country’s infrastructure—are unlikely either to achieve growth under extractive political institutions or to make major changes toward inclusive institutions. Instead, nations likely to grow over the next several decades—albeit probably under extractive institutions—are those that have attained some degree of political centralization. In sub-Saharan Africa this includes Burundi, Ethiopia, Rwanda, nations with long histories of centralized states, and Tanzania, which has managed to build such centralization, or at least put in place some of the prerequisites for centralization, since independence. In Latin America, it includes Brazil, Chile, and Mexico, which have not only achieved political centralization but also made significant strides toward nascent pluralism. Our theory would suggest that sustained economic growth is very unlikely in Colombia.
Our theory also suggests that growth under extractive political institutions, as in China, will not bring sustained growth, and is likely to run out of steam. Beyond these cases, there is much uncertainty. Cuba, for example, might transition toward inclusive institutions and experience a major economic transformation, or it may linger on under extractive political and economic institutions. The same is true of North Korea and Burma (Myanmar) in Asia. Thus, while our theory provides the tools for thinking about how institutions change and the consequences of such changes, the nature of this change—the role of small differences and contingency—makes more precise predictions difficult.
Even greater caution is necessary in drawing policy recommendations from this broad account of the origins of prosperity and poverty. In the same way that the impact of critical junctures depends on existing institutions, how a society will respond to the same policy intervention depends on the institutions that are in place. Of course, our theory is all about how nations can take steps toward prosperity—by transforming their institutions from extractive to inclusive. But it also makes it very clear from the outset that there are no easy recipes for achieving such a transition. First, the vicious circle implies that changing institutions is much harder than it first appears. In particular, extractive institutions can re-create themselves under different guises, as we saw with the iron law of oligarchy in chapter 12. Thus the fact that the extractive regime of President Mubarak was overturned by popular protest in February 2011 does not guarantee that Egypt will move onto a path to more inclusive institutions. Instead extractive institutions may re-create themselves despite the vibrant and hopeful pro-democracy movement. Second, because the contingent path of history implies that it is difficult to know whether a particular interplay of critical junctures and existing institutional differences will lead toward more inclusive or extractive institutions, it would be heroic to formulate general policy recommendations to encourage change toward inclusive institutions. Nevertheless, our theory is still useful for policy analysis, as it enables us to recognize bad policy advice, based on either incorrect hypothese
s or inadequate understanding of how institutions can change. In this, as in most things, avoiding the worst mistakes is as important as—and more realistic than—attempting to develop simple solutions. Perhaps this is most clearly visible when we consider current policy recommendations encouraging “authoritarian growth” based on the successful Chinese growth experience of the last several decades. We next explain why these policy recommendations are misleading and why Chinese growth, as it has unfolded so far, is just another form of growth under extractive political institutions, unlikely to translate into sustained economic development.
THE IRRESISTIBLE CHARM OF AUTHORITARIAN GROWTH
Dai Guofang recognized the coming urban boom in China early on. New highways, business centers, residences, and skyscrapers were sprawling everywhere around China in the 1990s, and Dai thought this growth would only pick up speed in the next decade. He reasoned that his company, Jingsu Tieben Iron and Steel, could capture a large market as a low-cost producer, especially compared with the inefficient state-owned steel factories. Dai planned to build a true steel giant, and with support from the local party bosses in Changzhou, he started building in 2003. By March 2004, however, the project had been stopped by order of the Chinese Communist Party in Beijing, and Dai was arrested for reasons never clearly articulated. The authorities may have presumed that they would find some incriminating evidence in Dai’s accounts. In the event, he spent the next five years in jail and home detention, and was found guilty on a minor charge in 2009. His real crime was to start a large project that would compete with state-sponsored companies and do so without the approval of the higher-ups in the Communist Party. This was certainly the lesson that others drew from the case.
