Saturday, November 22, 2014
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The *Poor Economics* in *Why Nations Fail*

A review: The first impression is that the authors of Poor Economics (PE) and Why Nations Fail (WNF) are productively at loggerheads over the causes of poverty and wealth. Acemoglu and Robinson (WNF) find fault in the optimistic “engineering” approach of Banerjee and Duflo (PE) and question their preference for the decentralized “power of small changes” which dispel ignorance at-the-margin in health or education and improve local decision making. The authors of PE criticize the “melancholy political economy” of WNF with its hard-to-change political institutions relentlessly locking-in developmental success and failure. Here is the caricature: 

  • WNF is the realistic-pessimistic historical vision of the primacy-cum-stasis of central institutional governance and social masses.
  • PE is the idealistic-optimistic people-centered vision of meaningful change in local institutions and technologies “from below”, facilitated by outside experts.

The locking of horns -- possibly more theatrical than real -- is only the latest in a string of public bullfights between economist-authors of popular books on development. PE versus WNF supersedes aspects of older debates; in other respects it leaves the bullring a muddier more churned-up battle ground than it already was after previous encounters.

What’s my beef? If you get the macro-institutional argument wrong, potentially it can have very dangerous consequences for many millions of people. In contrast, micro-institutional errors are by definition going to be comparatively benign, limited, more easily reversed. In fact the positive method in PE is to welcome errors along the journey to a correct policy.

I do have reservations about PE [previous post here]. Yet I would feel safer living in a PE world than in a WNF world. I accept, of course, the WNF arguments about the primacy of institutions, the finitude of the China model, and the shortcomings of culturalism. I’m a political economist. The final part of PE is titled ‘Against Political Economy’. Know thine enemy! However, strangely, unexpectedly, I’m siding with PE. The reason?

WNF gets the Big Picture wrong Big Time.

This may sound technical, but it’s actually quite basic and simple. The institutional knowledge in WNF is unsafe because it excludes *sequencing* and *procedural norms*.

Tiresome they may be, but conceptual categories are indispensable fuel stops on the route to knowledge. I believe I’m right in saying that Immanuel Kant’s persuasive argument was that knowledge is not achieved by building piles of facts-upon-facts but rather by constructing the categories to make sense of the relationships between the facts.

Let me untangle by singling out the most visible strand of disagreement: the role of politics. A convenient entry point is last weekend’s Guardian interview with Abhijit Banerjee (PE). Banerjee probably does not need to defend himself against the charge of being politically detached and ignoring power dynamics, because, by and large, PE does not operate at that level of analysis. Nevertheless, when the accusation came he said something interesting: “We need to learn to work with political systems that are not perfect instead of taking the view: let's first fix the politics, then we'll fix the rest. I don't believe the history of the last 200 years tells us that that's how things work. So in that sense I don't think we were saying politics is unimportant. We were saying: don't assume that bad politics is the end of the story.”

In WNF, politics is the beginning and end of the story. The world in WNF is comprised of wealthy countries with “inclusive” political and economic institutions, and poor countries where these institutions are “extractive”. The authors admit to “grey areas” in the inclusive-extractive “dichotomy”. Those grey areas cry out for illumination.

I fully agree with Fukuyama’s complaint. Viewed from the perspective of political and sociological sciences, WNF is extraordinarily superficial in handling key concepts like “institutions”. Furthermore, to even get at the conceptual categories I must wade through a sea of elementary facts and skip-till-my-head-spins across nations and centuries. If, as WNF claim, all countries face precisely the same institutional challenge, why go to schoolbook lengths to belabor the stories and characters? As I trawled WNF I thought wistfully of the subtlety of David Landes in The Wealth and Poverty of Nations, the beauty and originality of that book’s movement through regions and centuries. You struggle to discover exactly why Landes’ thesis about the primacy of culture may be wrong precisely because, though it too is not a conceptual book, it is at least clearly and securely anchored in the ideas of great historians and thinkers such as Adam Smith. WNF lacks anchorage in both theory and thinkers. Adam Smith is reduced to “invisible hand”, Joseph Schumpeter is reduced to “creative destruction”. Shame.

There is, in WNF, a fairly explicit chain of causation (variably implicit within the book, but explicit here) running from inclusive politics to inclusive economics. Inclusive political institutions “generate” inclusive economic institutions. The book makes a familiar case for historical contingency and incremental path-dependent change, and purportedly rejects all “recipes” and “heroic general policy recommendations to encourage change toward inclusive institutions”. And yet... having thrown out “authoritarian” and “engineering” and “foreign aid” solutions, the book ends with a romantic eulogy to... “empowerment”.

Because WNF foreswears conceptual nuance, its average readers will -- I suspect -- finish with one core message ringing loudly in their ears: The first element of any solution to poverty is political inclusion via empowerment.

Perhaps inadvertently, the term “empowerment” links WNV to a disreputable radical-moralizing in development studies and some fringe literature on workplace democracy. With respect to empowerment at least, PE and WNF sing from the same hymn sheet. However, the PE authors are experts in grassroots policy. They grasp the practical dimension. Empowerment may do no harm at that level. Sometimes it is a precondition of effective microlevel policy.

At the level of procedural structures for free political representation in complex mass society, the potentially perverse consequences of prioritizing empowerment are magnified. Let me explain why Banerjee (PE) is completely right to say “we need to learn to work with political systems that are not perfect”, though perhaps not for the reasons he has in mind.

1. Procedural Norms

The claim that *institutions matter* is quite new to economists. It was introduced in a brilliant conceptual package by Douglass North. In political or sociological science, and in philosophy, scholars have known it hundreds of years. Where progress is made in these fields of social science it is through systematic study of precisely *how* institutions operate badly or well. WNF have fun examples of institutions in operation, but the packaging is flimsy. They make little if any effort to systematise organizational qualities that matter.

There is no better guide to this field than one of the founding fathers of social science, Max Weber. Keep in mind what an *inclusive* institution might really look like if it is accurately theorized and relevant to development in today’s world. I summarize:

In the closed-exclusionary pre-modern political institution, power (administrative, military, etc.) is obtained face-to-face through purchase, privilege, patronage, personal connection, personal characteristics, social status. The modern state, in contrast, has formalized procedural rules for acquiring, using, maintaining, and losing power. The procedures are impersonal, meaning they are selection processes governed by formal equality of treatment and opportunity among all candidates and incumbents and clients.

"The bureaucratization of the state and of law in general presupposes the separation of the state from all personal authority of individuals. It was the complete depersonalization of administrative management and law."

This defining characteristic of a country’s institutional development is the precondition for inclusivity in politics as in economy. Weber said, it is only when the regulation of political and economic life is procedurally open rather than closed that “participants can expect the admission of outsiders to lead to an improvement of their own situation”. Market freedom -- like political freedom -- entails formal-legal procedural openness to outsiders and newcomers. It cannot be exclusionary.

2. Political Institutions

The same principles must be adopted eventually in politics. Equal voting rights are impersonal. Citizenship indicates a person’s impersonal status vis-à-vis the state, the absence of dependence on interpersonal relations of patronage or privilege as the source of status.

"Modern parliamentary representation shares with legal authority the general tendency to impersonality, the obligation to conform to abstract norms, political or ethical."

If political struggle is *not* channelled indirectly through legally constituted representative bodies, political decision making will be dominated by unregulated forces of popular justice and demagoguery. A modern society depends on clear “rules of war on the electoral battlefield regulated by law” to maintain "the impersonal character of public office”.

Politicians exercise authority over those who elected them only as long as they can prove their electoral worth. They do their work in impersonally regulated systems for competition, compromise, acquisition of competence and expertise, and public scrutiny. Says Weber:

"The term ‘democratization’ can be misleading. The demos itself, in the sense of a shapeless mass, never governs larger associations, but rather is governed. What changes is only the way in which the executive leaders are selected and the measure of influence which the demos is able to exert upon the content and direction of administration by means of public opinion. ‘Democratization’ does not necessarily mean an increasingly active share of the subjects in government. This may be the result of democratization, but it is not necessarily the case."

3. Sequenced Institutional Development

Now to the crux. I remain totally persuaded (by my book) that the historical-empirical and theoretical framework of Max Weber reveals a true sequence in the evolution of *good* institutions. The process does not begin with democracy or “political inclusivity”.

Suppression of violence may be the immediate developmental priority. Nevertheless, the emergence of states and law is initially an economic process. Momentum grows as markets spread. Commerce creates inclusivity. Traders learn they are better off individually if they share rules of fair dealing. Law emerges as courts and states recognize and enforce those ethics, rules, and rights of property and exchange. Impersonal public administration takes longer to consolidate, but does so on the foundation of laws. The outcome is democracy. This is formal, impersonal, genuinely competitive democracy in a representative body like parliament alongside the division of powers. In countries -- unlike in simple groups, villages, or workplaces -- it is not the primitive *direct* or *participatory* or *campfire* democracy that prevails. In countries, the chief will not see you raise your hand to vote against him.

In other words, the construction of genuine democracy is a direct extension of the dynamic that produced law and administration. Designers of good constitutions understand the process by which each institutional sphere -- representation, law, and administration -- continuously and reciprocally regulates procedural norms in each of the other spheres. Knowledge of these mechanics of democracy allows a country and its people to translate idealistic values into concrete results. Rulers and politicians won’t behave well until these principles are embedded in the institutional structure. This is the scientific precondition for “keeping the bastards honest” (as the popular old saying goes).

The message of Max Weber, then, is that no country ever summoned workable inclusive political institutions out of thin air. The prerequisite is a particular universal type and level of rule of law. Markets can operate without rules, but their very existence is the pressure that gives rise to effective rational law. Therefore, we find the sequence: 

…. markets>to>law>to>administration>to>democracy ….

The sequence is not rigid; there are combinations, different starting points. Yet the principle remains. Attempts to circumvent the sequence tend to end in trouble. Attempts to reverse the sequence by putting democracy before law are certain to produce disaster. Get the sequence wrong and you will be throwing the poor baby out with the bathwater. Nothing in the crop of important books on development published since 2009 shakes my confidence in that sequence or my optimism about achieving it by realistic and peaceful means.

In his critical review of WNF, Fukuyama said:
"There is in fact a lot of reason to think that expansion of the franchise in a very poor country may actually hurt state performance because it opens the way to clientelism and various forms of corruption."

Like Fukuyama, my first reaction to WNF was that although it was not sophisticated institutional analysis it was at least pressing the right buttons. Yes indeed, institutions matter. I reacted favorably in the comments section @EconTalk after Acemoglu’s podcast. In this post I’ve gone rather further than Fukuyama in arguing that the conceptual weaknesses of Why Nations Fail may leave students of development with a fundamental misunderstanding of institutions and development. Over-simplification is one thing; error is another.

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