Month: June 2013

Read Acemoglu too quickly, and it sounds like a libertarian rant. State bad, let property rip. They don’t help matters by embracing the moniker “libertarian.”

But one of the major rhetorical shifts one notes in Why Nations Fail is his how AceRob put the need for strong states at the center of their analysis. Check out their definition of “inclusive states”:

We will refer to political institutions that are sufficiently centralized and pluralistic as inclusive political institutions. When either of these conditions fails, we will refer to the institutions as extractive political institutions. (p. 85)

As far as I can tell, the book’s major innovation relative to their past work (besides its non-mathematical style) is that they substitute the word “inclusion” for what they used to call “institutions of private property.” This definitely changes the ideological resonance of the book, for the better.

Of course, a close read of their past work shows that they have long been concerned for state capacity. As Daron put it in a 2005 paper,

when both the state and the citizens make productive investments, it is no longer true that limiting the rents that accrue to the state is always good for economic performance. Instead, there needs to be a certain degree of balance of powers between the state and the citizens. When self-interested rulers expect too few rents in the future, they have no incentive to invest in public goods. Consequently, excessively weak states are likely to be as disastrous for economic development as the unchecked power and expropriation by excessively strong states…

there is [also] an optimal level of the political power of the state. Intuitively, when… the state is excessively powerful, citizens expect high taxes and choose very low levels of investment (effort). [When] the state is excessively weak and there is the reverse holdup problem; high taxes will encourage citizens to replace the ruler, and anticipating this, the ruler has little incentive to invest in public goods, because he will not be able to recoup the costs with future revenues…

[A] ‘‘consensually strong state’’ equilibrium… can emerge when citizens accept high taxes as long as there is a credible promise that a sufficient fraction of these will be invested in public goods. This equilibrium is made possible by the fact that the state is politically weak, so the elites can be replaced easily if the ruler deviates from the prescribed behavior.

This is Government by Goldilocks: not too big, not too small…. just right.

Continue reading “Government by Goldilocks” →

To revolt or not to revolt? That is the question that Acemoglu’s work doesn’t help us answer.

On the one hand, we have powerful elites that we must do our best to coddle, as I noted in my last post. This is in part so they don’t take away our tech toys (block innovation that unseats their political power), but in other cases – like a fairly glowing description of the coddling of Pinochet in Chile – coddling elites doesn’t seem to have any economic rationale.

Looking at the US South after the Civil War, AceRob conclude that de jure political changes will simply encourage elites to invest in de facto power. AceRob’s

book Why Nations Fail  sneeringly references the Mexican, Bolivian, Cuban, Nicaraguan and other Latin American revolutions, when “expropriation or the threat of expropriation of assets continued apace…” (page 48) Indeed, in an earlier paper on Latin America, they conclude that progressive governments tax too much, so sow the seeds of their own defeat by coup. Lula’s government in Brazil is praised for not undertaking radical revolution, while Peron’s Argentina is faulted for populism. The only praise the authors can manage for Hugo Chavez was that he was so incompetent that he couldn’t institutionalize his rule.

On the other hand, revolutions can be great. Acemoglu and company look at the parts of modern day Germany that were conquered by Napoleon (and had relatively modern legal systems imposed on them), and find that they experienced more rapid economic growth (as proxied by urbanization) than those regions that did not. A quick scan through Why Nations Fail will shows around a hundred mentions of the word “revolution,” a few condemning Great Leaps Forward, but mostly celebrating (mere) great leaps forward like the Glorious Revolution (rocked it), Neolithic Revolution (planted it) and the Industrial Revolution (built it on a steam ship). Deng’s “political revolution” in China gets a favorable nod. Even the South Korean land redistribution gets a positive nod in earlier work – although the authors fail to note the land was redistributed by the North Korean government when it temporarily occupied the South in 1950 (so much for the capitalist origins of the South Korean miracle!)

These revolution-hellyes-waithellno tendencies are on display in Acemoglu’s paper on Botswana’s development experience.

Continue reading “Rock the Kgotla?” →

The need to defer to the presently powerful is a troubling thread throughout Daron Acemoglu and company’s work.

For instance, Acemoglu and company describe US elites as being willing to let the country democratize and develop because they were assured that they wouldn’t be subject to income tax (until 1913). In Britain, agricultural elites were assured that the Industrial Revolution wouldn’t upset their interests, because they were given the House of Lords and Parliament only expanded the franchise gradually. In present day Germany after the 1850s, the landed Junker class stopped blocking industrialization when they were assured future influence within a ruling coalition with the rising bourgeoisie (sometimes called “Iron & Rye”).

It is difficult to not see this as taking sides. Why should it be inherently desirable to keep reactionary losers in power?

I think Daron and colleagues would argue that this is not a normative but a positive stance. In the countries that they study, coddling political losers seemed to pre-date positive economic transformations.

Continue reading “Leave it to losers” →

Daron Acemoglu doesn’t just want to explain democracy. He also wants to explain economic development.

In a major contribution from 2001, Acemoglu and coauthors Simon Johnson and James Robinson (AceJohnRob) argue that good institutions lead to economic growth.

While the AceRob work on democracy proceeded from game theory peppered with stylized interpretation of a few countries’ history, the AceJohnRob utilizes regression techniques. Indeed,what sets the AceRobJohn work apart from the long-line of “institutions causing growth” literature is an empirical strategy governed by the requirements of state-of-the-art regression work. In contrast, previous institutional research by Douglass North, Jack Knight and others seems motivated largely by positioning the author in relationship to the canon of Western historians and social theorists.
Almost as soon as the new institutional economics emerged on the scene, development scholars were arguing that – rather than institutions causing growth – growth might lead to good institutions. As countries get richer, their values or incomes orient them towards things like inclusive institutions and property rights protections.

The AceJohnRob work attempts to resolve this potential endogeneity / reverse causation problem.

Continue reading “Regressing to Colonial Times” →

Daron Acemoglu is an MIT economist and co-author of the popular book: Why Nations Fail: The Origins of Power, Prosperity and Poverty.

The book has been rightly celebrated as helping to enliven sterile debates within a highly mathematical economics profession about the “big questions” of social science, such as: how are politics and inequality connected to each other and to growth at the national level?

Taking my cue from my mentor Ha-Joon Chang’s book 23 Things They Don’t Tell you about Capitalism, I wanted to offer an evaluation of 23 articles and books of Acemoglu’s that led to and followed his 2012 book. (Photo credit: http://daronacemoglufacts.tumblr.com/.)

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Acemoglu and frequent co-author James Robinson (a political scientist now at Harvard) began a long line of published articles over 12 years ago, back in 2000. I’ll call the pair AceRob. Their initial articles used game theory to explain why nations do or do not democratize.

Their major contribution from that year specifically examined the economic conditions under which elites would choose to extend the voting franchise to the working classes. In their model, the fruits of economic growth accrue unevenly in countries. Specifically, the rich utilize technology that assure them steadily rising shares of the total national income, while the poor accumulate little to nothing.

This is a very unstable situation,with a constant threat of revolution. The elite have a choice to redistribute and maintain control, or democratize and accept the higher taxes that will come with that. Because the elites cannot credibly commit to redistribution in the future (i.e. their future incentives will not always line up with they say they will do), instability will continue, and a revolution where they lose everything might result. The elite are therefore better off over the long-term with democracy – which takes some but not all of their income away.

Predicting transitions to democracy then becomes about having just the right amount of inequality. With too little inequality, revolutions aren’t credible and non-democracy can persist for a long time (i.e. post-land reform Korea under the Park dictatorship). With too much inequality, a revolution threat can come “before its time”: the elite in this situation will have enough money to transfer to the poor for a while, but not enough to hold threats off forever (as in Germany in the 1800s). The key then is having credible revolutionary movements at the right time: which is what Acemoglu and Robinson said occurred in the 1800s and early 1900s in England, France and Sweden.

The authors maintain that their model explains franchise extension better than competing theories from other historians and political scientists. One competing theory is that the rich extended the franchise because of the influence of enlightenment views. However, these ideas were available to all European nations as of the 18th century, yet the franchise didn’t begin to be expanded until the 19th and 20th. Another theory argues that enfranchisement happened because the Conservatives then in power in countries like the UK wanted to curry favor with potential working class voters. AceRob don’t find this convincing, citing quotations that the Conservatives knew they could not get this vote. Finally, they discard a thesis associated with Barrington Moore – that it was the influence of a strong middle class that allowed for democratization – by returning to some quotes by middle class leaders that they saw the working class as dangerously redistributive (away from them), and noting that middle classes in Sweden and elsewhere were party members of the more elite parties.

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The AceRob analysis of democratization is mathematically elegant but sociologically blunt. It shows the surprising meeting point where Marx and neoclassical oversimplications meet – a notion I will return to in future posts.

It assumes that the interests of all parties are material and capable of being compared in financial terms. AceRob assumes that classes are unified, and know (and act) in their own interest here and in the future. Of course, information uncertainty and asymmetry and lack of class cohesion are the story of the Western World. AceRob would probably argue that, if things get sufficiently materially bad, incentives will overcome “false consciousness” (i.e. lack of alignment between values and objective class interests). But, this can have a post-hoc quality – if social change happens, it was because the incentives were sufficiently strong; if not, not. In retrospect, we can always explain things this way, but it becomes harder to predict without a theory of how values and incentives are reconciled.

They also have a highly problematic vision of the state. In elite control, all state power accrues to the rich. In revolution, to the (relatively unproductive) poor. In democracy, governments work in the interest of the poor median voter through efficient taxation and transfers. But history (especially successful developmental history) is full of relatively autonomous governments that pursue interests that go beyond the interests of the most economically dominant groups.

That said,their model has an interesting number of implications. For instance, even democracies can be unstable if inequality is so high that they don’t serve the interests of the poor. In this case, a winner-takes all incentive develops, whereby the rich fear higher taxes in the future, so engage in tax avoidance (in the model, through shifting from market to home production). If this goes on to far, the government is unable to function. Sound familiar to our current situation?