China, India and All That

Why Nations Fail

thecostaricanews.com

Daron Acemoglu and James Robinson

Let’s take a detour from our discussion of transitioning out of patronage politics and react to a thoughtful review of our book by Arvind Subramanian. Subramanian takes our theory to task for failing to account for what he argues to be the most important two observations, China and India. He first summarizes our theory as: democracy leads to long-run prosperity, and then points out that though most democracies are indeed prosperous, China has become relatively prosperous despite being ruled by an authoritarian regime, and India is much poorer than it should be despite its continuous democratic record since independence.

Thoughtful reviews deserve some (hopefully equally thoughtful) responses. Subramanian is certainly right to draw attention to China and India. But perhaps his review is too brief to have done justice to our theory and its implications on these topics — so much so that he actually omits any mention of the extensive discussion of China and extractive growth in the book.

First, our theory isn’t that political institutions directly determine economic prosperity. Rather, we claim that economic institutions determine economic prosperity, and explain why the link is between inclusive economic institutions and sustained economic growth — not necessarily short-run economic growth. We then argue that inclusive economic institutions can only survive in the long run if they are supported by inclusive political institutions. On the way, we provide explanations and examples for why for extended periods of time economic institutions with fairly important inclusive elements can coexist with extractive political institutions. This is all brought together under our discussion of extractive growth under the auspices of extractive political institutions (see Chapter 5). This is either because, as in the Soviet Union or the Caribbean plantation economies, extractive political and economic institutions can reallocate resources in a way that brings economic growth — typically when the elite expects to be the main beneficiary from such growth. Or because as in South Korea or Taiwan, extractive political institutions permit a certain degree of inclusivity to develop. In both cases the logic is clear: the elite, all else equal, would prefer more output, more revenue and more growth. It is the fear of creative destruction that often prevents it from adopting economic arrangements favoring growth or even blocking new technologies. When it feels secure or deems that it doesn’t have any other option, the elite will encourage economic growth.

In this light, as we argue in Chapters 14 and 15, China is not an exception to our theory. First, it is one of several examples of extractive growth — some others are discussed in Chapter 5. Second and very much in consistency with our theory, Chinese growth was spearheaded precisely by a major change in economic institutions, away from the most rigid central planning and collective ownership structure to one that allowed price incentives to encourage agricultural production for the market, at least at the margin. It continued when economic reform and liberalization — though sometimes lopsided still broadly step towards more inclusive economic institutions — spread to the urban sector and industry.

We also noted, in contrast to the standard accounts of Chinese economic reforms, that these didn’t have their origins in some clever planning by Chinese leaders but in political struggles within the Politburo pitting Deng Xiaoping against the Gang of Four. It was once again politics — not clever planning, design or economic advice — driving economics. In fact, the recent thought-provoking book by Victor Nee and Sonja Opper, Capitalism from Below convincingly argues that early reforms were neither instituted by the party nor were they outcomes of experimentation, but resulted from the party catching up with what had been going on on the ground given the political vacuum and crisis wrought by the Cultural Revolution. They point out that before Deng Xiaoping’s reforms, privately-led experiments with production for the market and ending collective incentives had started. For example, in Anhui province, peasant households had already dissolved communes and collectives before any reforms, and had started a land-lease system. They suggest it was this sort of development that forced the hand of Deng Xiaoping and Communist Party elites to start loosening of central planning and collectivization. Whether Nee and Opper’s interpretation is correct or not, what seems clear is that there was a radical change in economic institutions in China and most likely this resulted from a variety of political factors — rather than from Deng Xiaoping’s farsighted genius as the hagiographic biography of Deng, Deng Xiaoping, by Ezra Vogel suggests.

It is also in this context that Subramanian’s failure to recognize that the causality doesn’t run directly from political institutions to economic growth but from economic institutions to growth becomes misleading. So when economic institutions take steps towards greater inclusivity — which has happened many times in history and is exactly what happened in China starting in 1978 — this can usher a rapid period of economic growth. Where political institutions come in is that inclusive economic institutions can emerge and encourage growth in the short run but cannot survive in the long run under extractive political institutions. It is for this reason that the rapid growth of China over the last three decades isn’t an exception to our theory. If China manages to continue to grow for several more decades and reach levels of income per capita comparable to those of the United States or Germany while still austerely authoritarian and politically extractive, that would be an exception to our theory. This is exactly what we argue in Chapter 15 as well as pointing out why the transition from extractive to more inclusive political institutions in China will be difficult.

In contrast to China, there is much less in Why Nations Fail about India, mostly because of space limitations. Be that as it may, Subramanian’s summary that our theory suggests India should be prosperous isn’t quite right. 

We go to pains in the book to emphasize that electoral democracy isn’t the same as inclusive political institutions. This becomes particularly binding when it comes to India. India has been democratic since its independence, but in the same way that regular elections since 1929 don’t make Mexico under PRI control an inclusive society, Congress-dominated democratic politics of India doesn’t make India inclusive. Perhaps it’s then no surprise that major economic reforms in India started when the Congress Party faced serious political competition. In fact, the quality of democracy in India remains very low. Politics has not only been  dominated by the Congress party but continues to be highly patrimonial, and as we have been discussing recently, this sort of patrimonialism militates against the provision of public goods. Recent research by Toke Aidt, Miriam Golden and Devesh Tiwari (“Incumbents and Criminals in the Indian National Legislature”) shows there are other very problematic aspects of the Indian democratic system: a quarter of the members of the Lok Sabha, the Indian legislature, have faced criminal charges, but alarmingly, such politicians are more likely to be re-elected than those without criminal charges, reflecting the fact that Indian democracy is far from being an inclusive ideal.

What’s more, blaming India’s poverty on its democratic recent past, as Subramanian seems to do, is probably more than a little unfair. After all, India has been growing since independence even if the growth rate was disappointing for the first three decades, and it seems to have largely stagnated during British colonialism as Tirthankar Roy shows in The Economic History of India, 1857-1947.

All of this is not to say that the extractive-inclusive distinction captures the richness of politics and economics in China and India. In both cases, as in most other instances, more detailed analyses of political dynamics and economic origins of growth need to be conducted to gain a more satisfactory picture. But nor is it the case that India’s relative poverty and China’s recent economic surge disprove or even challenge our theory.