The basic theme of the book is what causes nations to fail where others succeed. The authors argue that the political institutions have a determining impact on the establishment of economic institutions. Basically two types of political institutions can be distinguished: “extractive” institutions in which all power is concentrated in a small group of individuals which exploit the rest of the population to their own benefit and “inclusive” institutions in which power and political rights are much more broadly distributed among the population. They suggest that economic prosperity and growth is not possible in “extractive” political systems, they argue that “inclusiveness” is essential for economic prosperity. The economic and industrial policy, the geographical situation, the culture of the nation and the value systems and natural disasters are not the discriminating factors for the prosperity of the country to the opinion of the authors.
For any economical growth a minimum of centralized governance is required to provide general public services like education, health care, elderly pensions, security and infrastructure. If these general and basic conditions are being fulfilled inclusive political institutions will boost technical innovation and entrepreneurship which will lead to economic development and prosperity. Extractive political institutions may also lead to economical growth but only in areas where technological development is not crucial to survive as a nation. These institutions block innovation to prevent the distribution of knowledge and development of a country as this may lead to a distribution of power and wealth to the disadvantage of the small group of the power holders. These extractive political systems will ultimately fail when inventions are needed to survive, but threaten the stability of privileges accumulated by the power holders. They call this “creative destruction” of the system, what economists often refer to as open market economy and competition.
They expect the very fast growing economy of China to break down as the country’s elite is still holding extractive type of political institutions, however, is the industrial and economic transformation of China not an example of a development from an extractive political system to a more inclusive one, entrepreneurship and innovation strongly supported by the central government? A large majority of Chinese citizens are much better off than 20 years ago. China is not an inclusive democratic country but is this a condition for economic prosperity? It certainly is working hard to improve the mentioned basic public systems. It has also developed a strategy for long-term growth. Instead the success of China is seen as temporary and will decline because it is being portrayed as an extractive political system. Infect this strongly centralized economy is a severe competitor of the more liberal capitalist western economies. Sometimes a strong leader makes the right choices for the development of a country. By contrast to their view on China they implicitly argue that the west will continue to grow because our institutions are inclusive. This is doubtful since at the moment we are in an economical crisis, the “occupy” and “outraged” movements question the participative nature of our democratic institutions, and all the time China’s economy is booming. Will the west continue to grow?
In the book Power and Prosperity Olson Mancur discusses other examples of nations like Chile, South Korea and Taiwan, all of which strongly developed to successful economies under non-inclusive political institutions, all of these extracted political institutions evolved into inclusive institutions. One could raise the question if this development is the cause or the result of the economic success?
The authors are very focussed on what happens within countries. Economical development is a result of inclusive institutions which allow “creative destruction.” They do not discuss absolute and comparative economical advantages based on the quantity and quality of production factors. In Porter’s book The Competitive Advantage of Nations these factors have been grouped into human resources (qualification level, cost of labor, commitment, etc.), material resources (natural resources, vegetation, space, etc.), knowledge resources, capital resources, and infrastructure. They also include factors like quality of research on universities, deregulation of labor markets, and liquidity of national stock markets. These national factors often provide initial advantages, which are subsequently built upon. Each country has its own particular set of factor conditions; hence, in each country will develop those industries for which the particular set of factor conditions is optimal. This explains the existence of so-called low-cost countries (low costs of labor), agricultural countries (large countries with fertile soil), or the start-up culture in the USA (well-developed venture capital market). Porter points out that these factors are not necessarily nature-made or inherited. They may develop and change. Political initiatives, technological progress or socio-cultural changes, for instance, may shape national factor conditions. These production factors allow or prevent countries to compete successfully with foreign markets, a very important accelerator of economical growth of a country. An important reason of economical failure of a nation in our globalized world is not being able to compete on an international scale.
The authors focus on nations, whereas transnational cooperation has become increasingly important. Transnational institutions play a very important role here. From the European Union to the North Atlantic Free Trade Association, to the United Nations to multi-national corporations like the WTO, the IMF, the WIPO, the UNCTAD, and the OECD, and NGO’s. Transnational institutions are an increasingly significant factor, which have their impact on competition between nations.
That international competition is very important for innovation and economic success is clearly illustrated with the development of Germany. From the nineteenth century until the end of Second World War Germany developed strongly under extractive institutions. Nazi Germany was one of the most extractive and violent institutions in history. Yet Germany was also during Second World War economically successful and highly innovative. It was mainly due to another extremely extractive country: Russia, that it could not expand further. The importance of the competition between states is clearly demonstrated during the Second World War. In the struggle for dominance, both sides were forced to develop new technology that would allow them to compete successfully with their enemy. As a result, the Second World War period was extremely lucrative in terms of inventions. The growth in the following 30 years of the century primarily involved integrating the advances made during the war into the civilian economy. Nuclear power, synthetic oil and synthetic rubber, electronics, jet aircraft and rocket ships, V1 and V2 rockets all developed during the war. Many other technologies pioneered during the Second World War had an enormous economic impact. Think of the commercial aviation industry and the German rocketry which was the pre development of our present GPS system. Two coding and decoding machines stand at the foundation of the modern day computer, namely the Enigma and the Lorentz machines, both machines date back to Second World War.
In many respects, the extractive Soviet Union picked up in the Cold War where Germany left off at the end of Second World War. They were the first to perform spaceflight both manned and unmanned, and never gave up their lead in tank technology. Indeed, one is tempted to point out that Russia did well under extractive communist institutions. These institutions were overturned by a civilian coup that was enabled by a failed military coup, the resulting inclusive political institutions could not prevent the complete economic ruin of the country. These examples illustrate that also under extracted institutions limited technical innovations are possible.
However, the history of Second World War and its aftermath is instructive in other ways as well. The inclusive institutions of the world fell into a deep economic crisis with the Great Depression – it was war with the extractive institutions in Germany, Italy and Japan that brought an end to the depression and the flowering of inventions on which post-war economic success was built. It is only after 1970, with the computer revolution, that we see real post-Second World War technology become important. Indeed, the fall of the Soviet Union is often attributed to its inability to keep up with the more decentralized economic model needed to deal with the post-industrial service economy. Acemoglu and Robinson’s observation that all exclusive institutions eventually fail, while inclusive ones may continue indefinitely is due to the event that the inclusive institutions of the west were able to integrate communications, services and computers into economic growth in a way that more centralized economic institutions did not. It appears that it is the match between institutions and technology that matters, and not that some institutions are intrinsically superior for all technologies. With mass production, extractive institutions appear to do quite well looking at China; with the service economy it is more difficult.
The fact is that Germany has done well in innovation under all sorts of institutions brings up the question whether it are the institutions that make the difference? Maybe it is the German culture which is the key driver for its innovation and economical power?
One issue that Acemoglu and Robinson quite well explain is the evolution from extractive to inclusive institutions. Historically institutional change often takes place through revolution. In some cases extractive institutions replace inclusive ones; in others one group of extractors is replaced by another. The authors argue that the key is whether revolutions are broad based or narrow based. While they make a good case, this is not completely true.
An important example is the broad-based French revolution of 1789. Yet the extractive monarchy was quickly replaced by the extractive Napoleonic regime which was again replaced by extractive regimes until the advent of the third Republic almost a century later in 1870. Acemoglu and Robinson argue that the eventual emergence of this inclusive regime is due to the original broad-based nature of the revolution. Given the substantial amount of time that elapsed between the revolution and the third Republic this is a difficult argument to make. There are many examples also for the other side of the coin – of narrow-based revolutions that have brought about inclusive institutions. A particularly simple one is the Italian “Risorgimento” that led to a more open political regime than those pre-existing the country’s unification and to substantial economic growth. It was, nevertheless, a pretty elitist affair. In more recent years, the Spanish transition from the dictatorship of Franco to democracy was a coup d’etat carried out by the King of Spain and a relatively small group of political dignitaries. On April 25, 1974, a radical fraction within the Portuguese Armed Forces, the MFA, revolted against the government. Until that day Portugal had been under a fascist dictatorship for over half a century. It led to the fall of the fascist dictatorship under Salazar for over half a century. Whether the MFA was left or right wing inclined was unclear at the time. The extracted military revolt created a space. Left-wing activists began returning from exile, and new political parties sprouted up. The parties all used the situation to gain political power in the government. At nearly the same time ordinary people, in contrast, used the situation to improve social conditions in their communities and workplaces through new autonomous organizations. It was here that the true revolution was fought.
The authors discuss a lot of interesting examples of not functioning extractive political systems in history and the present. They also address examples of successful inclusive political systems which have led nations to prosperity by inspiring leadership stimulating entrepreneurship and facilitating innovation and encouraging individuals to develop themselves. Reading the book it is striking that extractive political regimes are very persistent and clearly very difficult to develop to a more inclusive one. How it comes that so little people can be successful in exploiting so many sometimes hundreds of years?
Isn’t it very much related to the culture of a nation? Every person carries within him or herself patterns of thinking, feeling and acting that are learned throughout the person’s lifetime, both in extractive and in inclusive political systems. As soon as these have established themselves within a person’s mind he or she must unlearn these patterns before being able to learn something different, to act and behave different and unlearning is more difficult than learning for the first time. To evolve from thinking and feeling as learned under extractive institutions to thinking, feeling and acting under inclusive ones takes time. In his book Cultures and Organizations Hofstede calls these patterns of thinking, feeling and acting mental programs. Following Hofstede the sources of one’s mental programs lie within the social environments in which one grew up. The customary term for such mental behavior is culture. It does imply the learning from previous generations and of teaching the future generation what one has learned oneself. The core of culture is formed by (learned) values. Values could be described as broad tendencies to prefer certain states of affairs over others. Culture reproduces itself; it is passed from one generation to the other. No group or society can escape culture. Creating and maintaining shared rules and believes, even when they are not written down, is a precondition for group survival.
Countries differ in their institutions which mostly find there roots in historical events like colonization, international trade, wars, military coups, collective emigration, etc. These political institutions comprise rules, laws, education, health care, media, art, sciences and govern the distribution of power, ownership of production factors, wealth and income. A countries values are to some extend related to the structure and functioning of its institutions. There is an interaction of values and institutions visa versa. An important consequence of this fact is that we cannot change the way people in a country think, feel, act and behave by simply importing different institutions. Initially this can lead to a lot of confusion, disorder and even local resistance as political institutions and the herewith-related economical systems are not culture free.
In an extractive politic system people learn how to survive and what is considered good and obstructing behavior. They learn to accept power distance between themselves and those which possess the power and learn that power distance is a normal thing in life and should be accepted. People could perceive this difference in power as security, tradition and conformity. Though they may worry about the regime they welcome the comfort that their existence brings. In fact they want to follow clear rules and structures. They gain a sense of control through what they are told and are conforming to agreed laws and statues, they seek to preserve the order as it is. Any change could make them uncomfortable. This “conservation” as Schwartz calls it, is especially strong in collective cultures. Shane’s analyses showed negative correlation between the inventions patented and power distance, they found the same for uncertainty avoidance. Williams and McQuire found that power distance and uncertainty avoidance had a negative effect on economic creativity in a country. Very much related with culture is the level of trust inherent in a society as described by Francis Fukuyama in his book Trust, the Social Virtues and the Creation of Prosperity. The lack of trust outside the own collective, which could be described as the extended family, makes it hard to create networks with unrelated people, organizations, research institutes, government officials, etc. In strongly collective cultures this negatively effects innovation and economical development. The analyses of Shane and Williams and McQuire showed the same negative correlation.
Jagdeep S. Chohokar calls this loyalty and cohesiveness in their own organizations and families culture In-Group Collectivism Unfortunately these cultural aspects are not mentioned in the book.
Extracting political systems tend to survive during generations as the citizens have adopted cultural values as a result of it. These cultural values could lead to less initiative, less innovation and less entrepreneurship which could cause nations to become poor and eventually to fail. I therefore do not share the opinion of the authors of this book that not culture is an important cause of nations to fail.
They argue that “extractive institutions” were the cause of the collapse of the Mayan society in the end. How it comes that it could survive for close to 1,000 of years? Possibly it could because the Mayan society itself supported its own culture which was very developed in is top Classic Era period. One of the mightiest civilizations in the ancient Americas simply fell into ruin in a very short time. The Classic Era Maya civilization was quite advanced. The Maya were keen astronomers, plotting every aspect of the sky and accurately predicting eclipses and other phenomena. They had a series of overlapping calendars which were quite accurate. They had a well-developed religion and divine pantheon. In the cities, stonemasons created steal, statues which recorded the greatness of their leaders. Trade, particularly for prestige items like obsidian and jade, flourished. The Maya were well on their way to become a powerful empire when suddenly the civilization collapsed and the mighty cities were abandoned. There are many theories as to what happened to the Maya, but little consensus among experts. To mention a few: the famine theory as a result of overpopulation in combination with the depletion of agricultural soil, the environmental change theory which caused a draught, the disaster theory and the colonization by the Spanish. Experts in the field simply do not have enough solid information to state with clear-cut certainty how the Maya civilization ended. The downfall of the ancient Maya was likely caused by some combination of the factors above. It is almost certain that is wasn’t a political factor which led to a collapse of this very developed culture under an extractive political system.
The book has very interesting points to recommend it. First, it points out the importance of centralized political structure and all basic services for the citizens of a country which are conditional for economic success. Second, the acknowledgment that large inequality in power leads to a lower exploitation of resources or waste. Third, its explanation that inclusive political and economic institutions led to more and especially longer lasting economic prosperity for the citizens of a country. Fourth, they reason that technological and social innovation and capitalism lead to a broader distribution of power and wealth and therefore sometimes is blocked by those in power in extractive political systems. However, this is not always and entirely the case looking at the technological innovation in Germany and Russia during its extractive period.
The book has also some drawbacks. First, as already put forward it underestimates the key role of culture in the development and prosperity of nations. Second, it ignores and even denies the possible positive intentions of leaders of extractive institutions to bring more prosperity to its citizens. Third, it tries to bring everything back to the theory of extractive and inclusive political systems and its related economical systems. It ignores other important circumstances like upcoming competition from other nations, globalization, natural disasters, severe effects of global warming in specific countries, industrial governance of nations, etc.
Despite some less well-documented events and situations and the fact that the authors are very much focussed on there theory about extractive and inclusive nations and its consequences for innovation and economical growth it is a great book to read. It provides us with a lot of literature on development of nations with many interesting stories of developmental failure and success. It really makes you to think it over and over again.
