extracts “Why nations fail” Acemoglou - Robinson. US, Argentina, Egypt, kgotla Botswana, China, Brazil

PACKING THE COURT

"(USA)...Congress certainly would not have approved this, but then Roosevelt could have appealed to the nation, asserting that Congress was impeding the necessary measures to fight the Depression. He could have used the police to close Congress. Sound farfetched? This is exactly what happened in Peru and Venezuela in the 1990s. Presidents Fujimori and Chavez appealed to their popular mandate to close uncooperative congresses and subsequently rewrote their constitutions to massively strengthen the powers of the president..."

"… In 1990 Argentina finally experienced a transition between democratically elected governments—one democratic government followed by another. Yet, by this time democratic governments did not behave much differently from military ones when it came to the Supreme Court. The incoming president was Carlos Saϊl Menem of the Peronist Party. The sitting Supreme Court had been appointed after the transition to democracy in 1983 by the Radical Party president Raϊl Alfonsνn. Since this was a democratic transition, there should have been no reason for Menem to appoint his own court."

"… A Supreme Court can have power if it receives significant support from broad segments of society willing to push back attempts to vitiate the Court’s

independence. That has been the case in the United States, but not Argentina."

EL CORRALITO

"Argentina was in the grip of an economic crisis in late 2001. For three years, income had been falling, unemployment had been rising, and the country had

accumulated a massive international debt. The policies leading to this situation were adopted after 1989 by the government of Carlos Menem, to stop hyperinflation and stabilize the economy. For a time they were successful.

In 1991 Menem tied the Argentine peso to the U.S. dollar. One peso was equal to one dollar by law. There was to be no change in the exchange rate. End of story. Well, almost. To convince people that the government really meant to stick to the law, it persuaded people to open bank accounts in U.S. Dollars..."

"… the government then forcibly converted all the dollar bank accounts into pesos, but at the old one-for-one exchange rate. Someone who had had $1,000 saved suddenly found himself with only $250. The government had expropriated three-quarters of people’s savings."

"… During the periods of civilian rule there were elections—a democracy of sorts. But the political system was far from inclusive. Since the rise of Peron in the 1940s, democratic Argentina has been dominated by the political party he created, the Partido Justicialista, usually just called the Peronist Party. The Peronists won elections thanks to a huge political machine, which succeeded by buying votes, dispensing patronage, and engaging in corruption, including government contracts and jobs in exchange for political support. In a sense this was a democracy, but it was not pluralistic. Power was highly concentrated in the Peronist Party, which faced few constraints on what it could do, at least in the period when the military restrained from throwing it from power. As we saw earlier, if the Supreme Court challenged a policy, so much the worse for the Supreme Court.

In the 1940s, Peron had cultivated the labor movement as a political base. When it was weakened by military repression in the 1970s and ’80s, his party simply switched to buying votes from others instead. Economic policies and institutions were designed to deliver income to their supporters, not to create a level playing field. When President Menem faced a term limit that kept him from being reelected in the 1990s, it was just more of the same; he could simply rewrite the constitution and get rid of the term limit. As El Corralito shows, even if Argentina has elections and popularly elected governments, the government is quite able to override property rights and expropriate its own citizens with impunity. There is little check on Argentine presidents and political elites, and certainly no pluralism."

"… So Argentina at first appears a world apart from Peru or Bolivia, but it is really not so different once you leave the elegant boulevards of Buenos Aires. That the preferences and the politics of the interior got embedded into Argentine institutions is the reason why the country has experienced a very similar institutional path to those of other extractive Latin American countries.

That elections have not brought either inclusive political or economic institutions is the typical case in Latin America. In Colombia, paramilitaries can fix one-third of national elections. In Venezuela today, as in Argentina, the democratically elected government of Hugo Chavez attacks its opponents, fires them from public-sector jobs, closes down newspapers whose editorials it doesn’t like, and expropriates property. In whatever he does, Chavez is much more powerful and less constrained than Sir Robert Walpole was in Britain in the 1720s, when he was unable to condemn John Huntridge under the Black Act. Huntridge would have fared much less well in present-day Venezuela or Argentina.

While the democracy emerging in Latin America is in principle diametrically opposed to elite rule, and in rhetoric and action it tries to redistribute rights and opportunities away from at least a segment of the elite, its roots are firmly based in extractive regimes in two senses. First, inequities persisting for centuries under extractive regimes make voters in newly emerging democracies vote in favor of politicians with extreme policies. It is not that Argentinians are just naοve and think that Juan Peron or the more recent Peronist politicians such as Menem or the Kirchners are selfless and looking out for their interests, or that Venezuelans see their salvation in Chavez. Instead, many Argentinians and Venezuelans recognize that all other politicians and parties have for so long failed to give them voice, to provide them with the most basic public services, such as roads and education, and to protect them from exploitation by local elites. So many Venezuelans today

support the policies that Chavez is adopting even if these come with corruption and waste in the same way that many Argentinians supported Peron’s policies in the 1940s and 1970s. Second, it is again the underlying extractive institutions that make politics so attractive to, and so biased in favor of, strongmen such as Peron and Chavez, rather than an effective party system producing socially desirable alternatives. Peron, Chavez, and dozens of other strongmen in Latin America are just another facet of the iron law of oligarchy, and as the name suggests, the roots of this iron law lies in the underlying elite-controlled regimes"

KEEPING THE PLAYING FIELD AT AN ANGLE

"...Many sectors of the economy (Egypt) were dominated by state-owned

enterprises. Over the years, the rhetoric of socialism lapsed, markets opened, and the private sector developed.

Yet these were not inclusive markets, but markets controlled by the state and by a handful of businessmen allied with the National Democratic Party (NDP), the political party founded by President Anwar Sadat in 1978. Businessmen became more and more involved with them under the government of Hosni Mubarak."

"… In many sectors of the economy (Egypt), businessmen persuaded the government to restrict entry through state regulation. These sectors included the media, iron and steel, the automotive industry, alcoholic beverages, and

cement. Each sector was very concentrated with high entry barriers protecting the politically connected businessmen and firms. Big businessmen close to the regime, such as Ahmed Ezz (iron and steel), the Sawiris family (multimedia, beverages, and telecommunications), and Mohamed Nosseir (beverages and telecommunications) received not only protection from the state but also government contracts and large bank loans without needing to put up collateral..."

"The economic reforms of the 1990s promoted by international financial institutions and economists were aimed at freeing up markets and reducing the role of the state in the economy. A key pillar of such reforms everywhere was the privatization of state-owned assets. Mexican privatization, instead of increasing competition, simply turned state-owned monopolies into privately owned monopolies, in the process enriching politically connected businessmen such as Carlos Slim. Exactly the same thing took place in Egypt.

The businesspeople connected to the regime were able to heavily influence implementation of Egypt’s privatization program so that it favored the wealthy business elite—or the “whales,” as they are known locally. At the time that

privatization began, the economy was dominated by thirtytwo of these whales."

WHY NATIONS FAIL

"… the Egyptian Revolution was more a coup by a group of military officers. When Egypt changed sides in the cold war and became pro-Western, it was therefore relatively easy, as well as expedient, for the Egyptian military to change from central command to crony capitalism as a method of extraction."

"… extractive political institutions have created extractive economic institutions, transferring wealth and power toward the elite.

The intensity of extraction in these different countries obviously varies and has important consequences for prosperity. In Argentina, for example, the constitution and democratic elections do not work well to promote pluralism, but they do function much better than in Colombia..."

"… the long-run effect is the same: the state all but remains absent, and institutions are extractive. In all these cases there has been a long history of extractive institutions since at least the nineteenth century.

Each country is trapped in a vicious circle. In Colombia and Argentina, they are rooted in the institutions of Spanish colonial rule..."

"The solution to the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy. But it is not impossible, and the iron law of oligarchy is not inevitable. Either some preexisting inclusive elements in institutions, or the presence of broad coalitions leading the fight against the existing regime, or just the contingent nature of history, can break vicious circles. Just like the civil war in Sierra Leone, the Glorious Revolution in 1688 was a struggle for power. But it was a struggle of a very different nature than the civil war in Sierra Leone.

Conceivably some in Parliament fighting to remove James II in the wake of the Glorious Revolution imagined themselves playing the role of the new absolutist, as Oliver Cromwell did after the English Civil War. But the fact that Parliament was already powerful and made up of a broad coalition consisting of different economic interests and different points of view made the iron law of oligarchy less likely to apply in 1688..."

THREE AFRICAN CHIEFS

"The South African anthropologist Isaac Schapera describes how the kgotla worked as follows:

all matters of tribal policy are dealt with finally before a general assembly of the adult males in the chief’s kgotla (council place). Such meetings are very frequently held … among the topics discussed … are tribal disputes, quarrels between the chief and his relatives, the imposition of new levies, the undertaking of new public works, the promulgation of new decrees by the chief … it is not unknown for the tribal assembly to overrule the wishes of the chief. Since anyone may speak, these meetings enable him to ascertain the feelings of the people generally, and provide the latter with an opportunity of stating their grievances. If the occasion calls for it, he and his advisers may be taken severely to task, for the people are seldom afraid to speak openly and frankly.

Beyond the kgotla, the Tswana chieftaincy was not strictly hereditary but open to any man demonstrating significant talent and ability. Anthropologist John Comaroff studied in detail the political history of another of the Tswana states, the Rolong. He showed that though in appearance the Tswana had clear rules stipulating how the chieftancy was to be inherited, in practice these rules were interpreted to remove bad rulers and allow talented candidates to become chief. He showed that winning the chieftancy was a matter of achievement, but was then rationalized so that the successful competitor appeared to be the rightful heir. The Tswana captured this idea with a proverb, with a tinge of constitutional monarchy: kgosi ke kgosi ka morafe, “The king is king by the grace of the people.”

At independence, Botswana was one of the poorest countries in the world; it had a total of twelve kilometers of paved roads, twenty-two citizens who had graduated from university, and one hundred from secondary school. To top it all off, it was almost completely surrounded by the white regimes of South Africa, Namibia, and Rhodesia, all of which were hostile to independent African countries run by blacks. It would have been on few people’s list of countries most likely to succeed. Yet over the next forty-five years, Botswana would become one of the fastest-growing countries in the world. Today Botswana has the highest per capita income in sub-Saharan Africa, and is at the same level as successful Eastern European countries such as Estonia and Hungary, and the most successful Latin American nations, such as Costa Rica.

How did Botswana break the mold? By quickly developing inclusive economic and political institutions after independence. Since then, it has been democratic, holds regular and competitive elections, and has never experienced civil war or military intervention. The government set up economic institutions enforcing property rights, ensuring macroeconomic stability, and encouraging the development of an inclusive market economy. But of course, the more challenging question is, how did Botswana manage to establish a stable democracy and pluralistic institutions, and choose inclusive economic institutions, while most other African countries did the opposite? To answer this, we have to understand how a critical juncture, this time the end of colonial rule, interacted with Botswana’s existing institutions.

Early stages of independence would play out very differently in Botswana, again largely because of the background created by Tswana historical institutions. In this, Botswana exhibited many parallels to England on the verge of the Glorious Revolution. England had achieved rapid political centralization under the Tudors and had the Magna Carta and the tradition of Parliament that could at least aspire to constrain monarchs and ensure some degree of pluralism. Botswana also had some amount of state centralization and relatively pluralistic tribal institutions that survived colonialism.

Though the early growth in Botswana relied on meat exports, things changed dramatically when diamonds were discovered. The management of natural resources in Botswana also differed markedly from that in other African

nations. During the colonial period, the Tswana chiefs had attempted to block prospecting for minerals in Bechuanaland because they knew that if Europeans

discovered precious metals or stones, their autonomy would be over. The first big diamond discovery was under Ngwato land, Seretse Khama’s traditional homeland.

Before the discovery was announced, Khama instigated a change in the law so that all subsoil mineral rights were vested in the nation, not the tribe. This ensured that diamond wealth would not create great inequities in Botswana. It also gave further impetus to the process of state centralization as diamond revenues could now be used for building a state bureaucracy and infrastructure and for investing in education."

THE IRRESISTIBLE CHARM OF AUTHORITARIAN GROWTH

"(China) … His real crime was to start a large project that would compete with statesponsored companies and do so without the approval of the higher-ups in the Communist Party. This was certainly the lesson that others drew from the case.

The Communist Party’s reaction to entrepreneurs such as Dai should not be a surprise. Chen Yun, one of Deng Xiaoping’s closest associates and arguably the major architect behind the early market reforms, summarized the views of most party cadres with a “bird in a cage” analogy for the economy: China’s economy was the bird; the party’s control, the cage, had to be enlarged to make the bird healthier and more dynamic, but it could not be unlocked or removed, lest the bird fly away."

"… Even if Chinese economic institutions are incomparably more inclusive today than three decades ago, the Chinese experience is an example of growth under extractive political institutions. Despite the recent emphasis in China on innovation and technology, Chinese growth is based on the adoption of existing technologies and rapid investment, not creative destruction. An important aspect of this is that property rights are not entirely secure in China. Every now and then, just like Dai, some entrepreneurs are expropriated. Labor mobility is tightly regulated, and the most basic of property rights, the right to sell one’s own labor in the way one wishes, is still highly imperfect. The extent to which economic institutions are still far from being truly inclusive is illustrated by the fact that only a few businessmen and -women would even venture into any activity without the support of the local party cadre or, even more important, of Beijing. The connection between business and the party is highly lucrative for both.

Businesses supported by the party receive contracts on favorable terms, can evict ordinary people to expropriate their land, and violate laws and regulations with impunity.

Those who stand in the path of this business plan will be trampled and can even be jailed or murdered"

"… Today the party’s control over the media, including the Internet, is unprecedented. Much of this is achieved through self-censorship: media outlets know that they should not mention Zhao Ziyang or Liu Xiaobo, the government critic demanding greater democratization, who is still languishing in prison even after he was awarded the Nobel Peace Prize. Self-censorship is supported by an Orwellian apparatus that can monitor conversations and communications, close Web sites and newspapers, and even selectively block access to individual news stories on the Internet. All of this was on display when news about corruption charges against the son of the general secretary of the party since 2002, Hu Jintao, broke out in 2009. The party’s apparatus immediately sprang into action and was not only able to prevent Chinese media from covering the case but also managed to selectively block stories about the case on the New York Times and Financial Times Web sites.

Because of the party’s control over economic institutions, the extent of creative destruction is heavily curtailed, and it will remain so until there is radical reform in political institutions"

"… Argentina was also one of the richest countries in the world in the nineteenth century, as rich as or even richer than Britain, because it was the beneficiary of the worldwide resource boom; it also had the most educated population in Latin America. But democracy and pluralism were no more successful, and were arguably less successful, in Argentina than in much of the rest of Latin America. One coup followed another, and as we saw in, even democratically elected leaders acted as rapacious dictators. Even more recently there has been little progress toward inclusive economic institutions, and as we saw in, twenty-first-century Argentinian governments can still expropriate their citizens’ wealth with impunity."

YOU CAN’T ENGINEER PROSPERITY

"...many economies around the world ostensibly implementing such reforms, most notably in Latin America, stagnated throughout the 1980s and ’90s. In reality, such reforms were foisted upon these countries in contexts where politics went on as usual. Hence, even when reforms were adopted, their intent was subverted, or politicians used other ways to blunt their impact. All this is illustrated by the “implementation” of one of the key recommendations of international institutions aimed at achieving macroeconomic stability, central bank independence. This recommendation either was implemented in theory but not in practice or was undermined by the use of other policy instruments. It was quite sensible in principle. Many politicians around the world were spending more than they were raising in tax revenue and were then forcing their central banks to make up the difference by printing money. The resulting inflation was creating instability and uncertainty. The theory was that independent central banks, just like the Bundesbank in Germany, would resist political pressure and put a lid on inflation. Zimbabwe’s president Mugabe decided to heed international advice; he declared the Zimbabwean central bank independent in 1995. Before this, the inflation rate in Zimbabwe was hovering around 20 percent. By 2002 it had reached 140 percent; by 2003, almost 600 percent; by 2007, 66,000 percent; and by 2008, 230 million percent!..."

"… the nongovernmental organization (NGO) Seva Mandir to improve health care delivery in the state of Rajasthan in India...

In 2006 Seva Mandir together with a group of economists, designed an incentive scheme to encourage nurses to turn up for work in the Udaipur district of Rajasthan. The idea was simple: Seva Mandir introduced time clocks that would stamp the date and time when nurses were in the facility. Nurses were supposed to stamp their time cards three times a day, to ensure that they arrived on time, stayed around, and left on time. If such a scheme worked, and increased the quality and quantity of health care provision, it would be a strong illustration of the theory that there were easy solutions to key problems in development.

In the event, the intervention revealed something very different. Shortly after the program was implemented, there was a sharp increase in nurse attendance. But this was very short lived. In a little more than a year, the local health administration of the district deliberately undermined the incentive scheme introduced by Seva Mandir.

Absenteeism was back to its usual level, yet there was a sharp increase in “exempt days,” which meant that nurses were not actually around—but this was officially sanctioned by the local health administration. There was also a sharp increase in “machine problems,” as the time clocks were broken. But Seva Mandir was unable to replace them because local health ministers would not cooperate"

THE FAILURE OF FOREIGN AID

"… two important lessons here. First, foreign aid is not a very effective means of dealing with the failure of nations around the world today. Far from it. Countries need inclusive economic and political institutions to break out of the cycle of poverty. Foreign aid can typically do little in this respect, and certainly not with the way that it is currently organized. Recognizing the roots of world inequality and poverty is important precisely so that we do not pin our hopes on false promises. As those roots lie in institutions, foreign aid, within the framework of given institutions in recipient nations, will do little to spur sustained growth. Second, since the development of inclusive economic and political institutions is key, using the existing flows of foreign aid at least in part to facilitate such development would be useful. As we saw, conditionality is not the answer here, as it requires existing rulers to make concessions. Instead, perhaps structuring foreign aid so that its use and administration bring groups and leaders otherwise excluded from power into the decision-making process and empowering a broad segment of population might be a better prospect."

EMPOWERMENT

(Brazil) "… By late 1978, Lula was floating the idea of creating a new political party, the Workers’ Party. This was to be the party not just of trade unionists, however. Lula insisted that it should be a party for all wage earners and the poor in general. Here the attempts of union leaders to organize a political platform began to coalesce with the many social movements that were springing up.

In taking over many local governments, something that accelerated in the 1990s, the Workers’ Party began to enter into a symbiotic relationship with many local social movements. In Porto Alegre the first Workers’ Party administration after 1988 introduced “participatory budgeting,” which was a mechanism for bringing ordinary citizens into the formulation of the spending priorities of the city. It created a system that has become a world model for local government accountability and responsiveness, and it went along with huge improvements in public service provision and the quality of life in the city. The successful governance structure of the party at the local level mapped into greater political mobilization and success at the national level. Though Lula was defeated by Fernando Henrique Cardoso in the presidential elections of 1994 and 1998, he was elected president of Brazil in 2002. The Workers’ Party has been in power ever since.

The rise of Brazil since the 1970s was not engineered by economists of international institutions instructing Brazilian policymakers on how to design better policies or avoid market failures. It was not achieved with injections of foreign aid. It was not the natural outcome of modernization.

Rather, it was the consequence of diverse groups of people courageously building inclusive institutions.

Eventually these led to more inclusive economic institutions. But the Brazilian transformation, like that of England in the seventeenth century, began with the creation of inclusive political institutions.

There are many parallels between these historical processes of empowerment and what took place in Brazil starting in the 1970s. Though one root of the Workers’ Party is the trade union movement, right from its early days, leaders such as Lula, along with the many intellectuals and opposition politicians who lent their support to the party, sought to make it into a broad coalition. These impulses began to fuse with local social movements all over the country, as the party took over local governments, encouraging civic participation and causing a sort of revolution in governance throughout the country. In Brazil, in contrast with England in the seventeenth century or France at the turn of the eighteenth century, there was no radical revolution igniting the process of transforming political institutions at one fell swoop.

More important, empowerment at the grass-roots level in Brazil ensured that the transition to democracy corresponded to a move toward inclusive political institutions, and thus was a key factor in the emergence of a government committed to the provision of public services, educational expansion, and a truly level playing field. As we have seen, democracy is no guarantee that there will be pluralism. The contrast of the development of pluralistic institutions in Brazil to the Venezuelan experience is telling in this context. Venezuela also transitioned to democracy after 1958, but this happened without empowerment at the grassroots level and did not create a pluralistic distribution of political power. Instead, corrupt politics, patronage networks, and conflict persisted in Venezuela, and in part as a result, when voters went to the polls, they were even willing to support potential despots such as Hugo Chαvez, most likely because they thought he alone could stand up to the established elites of Venezuela. In consequence, Venezuela still languishes under extractive institutions, while Brazil broke the mold.

One other actor, or set of actors, can play a transformative role in the process of empowerment: the media. Empowerment of society at large is difficult to

coordinate and maintain without widespread information about whether there are economic and political abuses by those in power. We saw in chapter 11 the role of the media in informing the public and coordinating their demands against forces undermining inclusive institutions in the United States. The media can also play a key role in channeling the empowerment of a broad segment of society into more durable political reforms, again as illustrated in our discussion in chapter 11, particularly in the context of British democratization."

"… Fujimori and Montesinos thought that controlling the media was much more important than controlling politicians and judges. One of Montesinos’s henchmen, General Bello, summed this up in one of the videos by stating, “If we do not control the television we do not do anything.”

The current extractive institutions in China are also crucially dependent on Chinese authorities’ control of the media, which, as we have seen, has become frighteningly sophisticated. As a Chinese commentator summarized, “To uphold the leadership of the Party in political reform, three principles must be followed: that the Party controls the armed forces; the Party controls cadres; and the Party controls the news.”"

"… meaningful change only when a broad segment of society mobilizes and organizes in order to effect political change, and does so not for sectarian

reasons or to take control of extractive institutions, but to transform extractive institutions into more inclusive ones.

Whether such a process will get under way and open the door to further empowerment, and ultimately to durable political reform, will depend, as we have seen in many different instances, on the history of economic and political

institutions, on many small differences that matter and on the very contingent path of history."