Why Nations Fail
Based on
Why Nations Fail: The Origins of Power, Prosperity and Poverty
by Daron Acemoglu and James A. Robinson
Daron Acemoglu
MIT
April 27, 2011
Acemo glu (MIT ) Why Nat ions Fail April 27, 20 11 1 / 48
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Why Nations Fail
Based on
Why Nations Fail: The Origins of Power, Prosperity and Poverty
by Daron Acemoglu and James A. Robinson
Daron Acemoglu
MIT
April 27, 2011
Introduction
The Lay of the Land
Western Offshoots
Western Europe
Africa
America^ Latin Asia 6
7
8
9
10
log gdp per capita
1000 1200 1400 1600 1800 2000 year
Figure: The evolution of average GDP per capita in Western O§shoots, Western Europe, Latin America, Asia and Africa, 1000-2000.
The Beginning
The Beginningó United States
Colonization attempts of Virginia Company in Jamestown in early 17th century, attempting to re-create an authoritarian, ìextractiveî regime: ìNo man or woman shall run away from the colony to the Indians, upon pain of death. Anyone who robs a garden, public or private, or a vineyard, or who steals ears of corn shall be punished with death. No member of the colony will sell or give any commodity of this country to a captain, mariner, master or sailor to transport out of the colony, for his own private uses, upon pain of death.î [from the laws passed by Sir Thomas Gates and Sir Thomas Dale].
But the Company was unsuccessfuló it could not force the English settlers into gang labor and low wages.
The Beginning
The Beginningó United States (continued)
The Company switched to the ëheadright systemígiving all settlers 50 acres of land and then shortly thereafter also political rights, in the form of it General Assembly. Similar events unfolded in Chesapeake Bay, Maryland and Carolina. The chain of events that ultimately leading to the Declaration of Independence and the U.S. Constitution.
Main Concepts Inclusive and Extractive Institutions
Towards a Theory of Institutions
Extractive economic institutions: Lack of law and order. Insecure property rights; entry barriers and regulations preventing functioning of markets and creating a nonlevel playing Öeld. Extractive political institutionsó in the limit ìabsolutismî: Political institutions concentrating power in the hands of a few, without constraints, checks and balances or ìrule of lawî. Inclusive economic institutions: Secure property rights, law and order, markets and state support (public services and regulation) for markets; open to relatively free entry of new businesses; uphold contracts; access to education and opportunity for the great majority of citizens. Inclusive political institutions: Political institutions allowing broad participationó pluralismó and placing constraints and checks on politicians; rule of law (closely related to pluralism). But also some degree of political centralization for the states to be able to e§ectively enforce law and order.
Main Concepts Inclusive and Extractive Institutions
Synergies
Economic Institutions Inclusive Extractive Political Inclusive # Institutions Extractive " !
Main Concepts Labor Coercion
An Example: Labor Coercion
ìIn the context of universal history, free labor, wage labor, is the peculiar institutionîó M.I. Finley Forced labor (slavery, serfdom) basis of ancient Greece, Egypt and Rome; several Islamic and Asian empires; most pre-Colombian civilizations; plantation economies in Latin America and the U.S. South; European agriculture until the 19th century (feudalism). The ILO estimates that there are still between 8 and 12 million forced laborers worldwide, not counting forced sex workers. Acemoglu and Wolitzky (2010) ìThe Economics of Labor Coercionî: Principal-agent model of coercion, where coercioncostly reduction in agentís outside option. The option to coerce will always lead to ine¢ ciency because of the redistributive role of coercion. This ine¢ cient economic institution may be widespread because it beneÖts employers at the expense of workers.
Main Concepts Labor Coercion
Labor Coercion (continued)
Central question: Does labor scarcity lead to more or less coercion? ìI would... expect to Önd a positive statistical correlation between free land and serfdom (or slavery)îó E. Domar Neo-Malthusian economic history: falling population in the 14th century leading to the collapse of feudalism: H.J. Habakkuk, M.M. Postan, North and Thomas. Brenner critique: falling population did not lead to the collapse of feudalism everywhere; second serfdom in Eastern Europe. Answer: (^1) better outside options for workers reduce coercion! ìoutside option e§ectî from lower population (^2) ìprice e§ectî increasing coercion when prices are higher, e.g., because of lower population (^3) the impact of lower population on coercion di§erent depending on how developed cities are and how large the price e§ect is.
Main Concepts Logic of Extractive Institutions
Political Losers
Acemoglu and Robinson (2006) ìEconomic Backwardness in Political Perspectiveî: a switch towards a more inclusive economic institutions may reduce the ability of the ruler to maintain power. Acemoglu, Egorov and Sonin (2010) ìDynamics and Stability of Constitutions, Coalitions and Clubsî: Three states: absolutism, constitutional monarchy, full democracy Two groups: the elite and middle class. The elite have political power under absolutism, and the middle class have decisive power both under constitutional monarchy and full democracy Payo§s:
Elite: democracy < absolutism < constitutional monarchy Middle class: absolutism < constitutional monarchy < democracy
Myopic elite: absolutism!constitutional monarchy!democracy Forward-looking elite: stay in absolutism.
Main Concepts Growth under Extractive Political Institutions
Growth under Extractive Political Institutions
Though growth is much more likely under inclusive institutions, it is still possible under extractive institutions. Why?! Generate output and resources to extract. Two types of growth under extractive political institutions: (^1) extractive economic institutions allocating resources to high productivity activities controlled by the elites (e.g., Barbados, Soviet Union) (^2) when relatively secure in their position, the elites may wish to allow the emergence of relatively inclusive economic institutions under their control (e.g., South Korea under General Park, China today). But big di§erence from growth under inclusive institutions: no creative destruction and dynamics very di§erent. Consequently, even though growth is possible under extractive institutions, this will not be sustained growth.
Institutional Change Small Di§erences and Critical Junctures
Towards a Theory of Institutional Change
Conáict pervasive in society. Leading to di§erential institutional drift! small but notable di§erences in institutions across nations Small di§erences that matter.
institutionst ! drift
institutionst + 1 ! % institutional " & divergence critical juncture
But outcomes during these critical junctures not historically determined, partly contingent ( stochastic). Naturally, the changes that happen as a result of this interaction then become the backgroundó small or not so smalló institutional di§erences upon which new critical junctures act.
Institutional Change Small Di§erences and Critical Junctures
Transition to Inclusive Institutions
Extractive institutions have been the norm in world history. Where do inclusive institutions come from? Earlier moves towards inclusive institutions resulting from conáict and institutional driftó Roman Republic, Venice, but ultimately reversed. Crucial turning point: the Glorious Revolution in England in 1688. The Glorious Revolution brought much more inclusive, pluralistic political institutions which then led to a transition towards much more inclusive economic institutions. This created the conditions which led to the Industrial Revolution. Growth in the 19th century and dissemination of industry were conditioned by interactions between initial institutional di§erences and the critical junctures created by political events and the Industrial Revolution itself.
Institutional Change Small Di§erences and Critical Junctures
Institutional Divergence at Critical Junctures: Black Death
and Feudalism
The divergence of Western and Eastern Europe after the Black Deathó in the West the power of landlords declines and feudalism withers away, in the East the power of landlords intensiÖes leading to the Second Serfdom in the 16th century. This institutional divergence driven by a large demographic shock interacting with initial institutional di§erences (organization of peasant communities, distribution of landholdings). Key mechanism: increases in wages following population decline (e.g., Phelps Brown and Hopkins, 1956).
Institutional Change Small Di§erences and Critical Junctures
Meanwhile in Mexico: Implications of Coercion
The e§ects of lower population very di§erent when there is coercion. Another instance of institutional divergence.
Population and Average Real Daily Wages for Unskilled Repartimiento (Labor Draft) Workers
Source: Own Calculations based on Borah and Cook (1958) and Gibson (1964).
.06.08 .1 .12.14.16Real Wage (in fanegas of maize) 0
500000
1000000
1500000
Population
(^1500 1550) Year 1600 1650 Population Real Wages for Repartimiento Workers Acemoglu (MIT) Why Nations Fail April 27, 2011 20 / 48