Sunday, January 25, 2015

Follow-up on "Why nations fail"

So, halfway done with the book "Why nations fail". 

The premise is simple: extractive institutions limit a nation's growth and benefits a few at the expense of many, while inclusive institutions cause the opposite: they foster competition and level the playing field, promoting a meritocracy that results in more a more prosperous nation.

Guns, germs and steel author Jared Diamond and other scientists/economists/academics argue that while authors Acemoglu and Robinson have a point, they're being overtly simplistic and are thus excluding other important factors (like geography, culture, etc).

David Levine, an American economist, and two of his colleagues wrote an interesting review of the book, questioning Acemoglu and Robinson's theories directly: their review presents Germany as a special case - a country that fared both well and badly under extractive (National Socialism during the 30's and 40's) and inclusive (the Weimar Republic) institutions. It turns out that Germany fared particularly well under the Nazi regime, having almost conquered most of Europe during the Third Reich, dominating their neighbors easily via their military force and industrial/economics prowess. 

At the time, it turns out, Germany was also neck-and-neck with other countries in terms of advances in technology, something that contradicts one of Acemoglu and Robinson's hypotheses: that extractive institutions ultimately fail because they don't advance technologically. And no one can deny that Hitler's government was anything but extractive. 

Veering towards an inclusive institution - before Nazi Germany, and after Imperial Germany came the Weimar Republic. Germany's transition to a more democratic state during the early 20th century turned out to be a disaster. Hard to believe, but Germany went through hyperinflation during that time. 

Inclusive institutions, thus, do not automatically provoke its agents to summarily choose or decide to take on the best economic and political policies. 

Meaning: inclusive institutions do not guarantee prosperity.

Extractive institutions, it seems, can advance in the realm of technology, and not necessarily meet an unavoidable dead end. 

Meaning: extractive institutions are not necessarily doomed to fail.

Both inclusive and extractive institutions can thus be good and bad for their nations.

To be fair regarding the Germany Case Study as profiled by Levine et co: the review authors might do well to study Russia and their extractive institutions during the Cold War years. Acemoglu and Robinson do mention how the Russians were advancing at an accelerated rate, during the Soviet era, but point out how that came to an end because of technology. And how even economist Paul Samuelson predicted that the USSR would (or could) overtake the US in economic terms. 

Amidst such contradictions, doubt now pervades in my mind. 

While simplicity, they say, is the seal of truth - in attempting to prove and answer whether inclusive institutions are all a country need to prosper, I'd go with the stereotypical consultant's response: it depends.

But, like so many other theories and hypotheses, it does not necessarily matter, if in the end, the research that led up to the original premise provides thought-provoking theory that effectuates change

Change could come from mere consciousness. 

I have found Acemoglu and Robinson's hypotheses about institutions to be a useful base to start from, particularly when thinking about my current perception about what goes (and has gone) on in Mexico. 

James Robinson wrote an apt account about Mexico, under the "Why nations fail" guise. True or not, having described in detail how Mexico's current and past political institutions have shaped the country, and how specific perverse incentives, have led to certain consequences, resonated with me.  

The wise adage holds that those who do not learn from history are bound to repeat it. At the very least, I think that somehow the authors are asking us to do the same (regardless of whether their theories hold water, or hold 100% of the water, as it were).