March 31, 2012

THE DYING DRAGON:

The Roots of Hardship: Despite massive amounts of aid, poor countries tend to stay poor. Maybe their institutions are the problem. (WILLIAM EASTERLY, 3/30/12, WSJ)

Much of European colonization was extractive, since either no Europeans or only a small minority of them settled in the colonies for the long haul. That North America was different was due to the majority middle class of family farmers that settled it, compared with a minority European elite in South America. Extractive institutions also produce more violence as rival elites fight over the reins of power--which helps to explain South America's long history of military coups and civil wars.

"Why Nations Fail" also offers this crucial insight: Experts cannot engineer prosperity with the right advice to rulers on policies and institutions. Rulers "get it wrong not by mistake or ignorance but on purpose." Change happens only when a broad coalition revolts, forcing the elite to allow more pluralistic political competition (e.g., the Glorious Revolution in England, the Meiji overthrow of Japanese feudalism and Botswana's democratic ouster of British colonizers).

Extractive states can have bursts of growth. After all, even a kleptocratic elite will covet a larger economy ripe for plundering. The elites have an incentive to invest in their own businesses. But authoritarian growth miracles cannot last. As economists have understood since Joseph Schumpeter in the 1940s, sustained economic growth requires "creative destruction," as new technologies replace old ones. The booming Chinese economy may look impressive today, but for Messrs. Acemoglu and Robinson, China's leaders revealed a critical flaw in 2003 when they arrested Dai Guofang and sentenced him to five years in prison.

What was Mr. Dai's crime? He had dared to start a low-cost steel company that would compete with Party-sponsored factories. Members of an extractive elite will not allow creative destruction to eliminate their own enterprises; the potential of existing technologies is fully exploited, but no innovation develops--and growth cannot be sustained. Messrs. Acemoglu and Robinson note that the Soviets experienced rapid growth in the 1950s and 1960s but then, hamstrung by an economy unable to innovate, fell into stagnation and collapse. The authors make a bold prediction: "The spectacular growth rates in China will slowly evaporate," and the Chinese will ultimately follow the Soviet trajectory.


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Posted by at March 31, 2012 5:35 AM
  

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