Extractive growth: response to Matt Yglesias

Matt Yglesias followed up his fascinating Slate article on how Why Nations Fail can be used to interpret the economics of the Hunger Games with a blog post raising interesting questions on the nature of extractive growth.

Yglesias asks the following question: Colombia, Pakistan, Syria, Yemen, Ethiopia and China have all of extractive institutions, but Colombia has income per capita of about $10,000 and China’s stands at over $8000 (all in PPP), while Pakistan, Syria, Yemen and Ethiopia are much poorer. So perhaps we should focus more on why Syria, Yemen and Ethiopia aren’t more like Colombia than on why Colombia isn’t more like Denmark.

This is a fair point. It really has two parts. First, it would indeed be a mistake to just focus on the differences between countries with the most inclusive institutions and those with the most extractive institutions. Almost all countries are in shades of gray, and that matters enormously for the prosperity of their citizens. Looked at it that way, the comparison of Colombia and, say, Syria and Yemen should not be a major puzzle. Though Colombia has on balance extractive institutions, with perhaps one third of the country still under the influence or direct control of paramilitaries and armed groups, it also has developed certain fairly inclusive institutional elements since its independence in 1819. Some people’s property rights are secure and businessmen operating in the big cities like Bogotá and Medellín have access to high skilled workers and efficient finance. Though public services are non-existent in large parts of the country, for instance in La Danta (see our previous blog post), where the paramilitaries provide the services instead, in Bogotá and Medellín it is a different story, and in the last decades independent reformist mayors such as Antanas Mockus and Sergio Fajardo have made big improvements. 

On the one hand there is a lot of corruption in the judiciary. Take, for example, the ex Senator Juan Carlos Martinez (who you may recall from this blog post). He was released from prison for a weekend by a judge ostensibly to see his sick mother. It just so happened that this was the same weekend in October last year when all the local elections were taking place, and Martinez was heavily involved in helping fix election outcomes. What a coincidence! Yet on the other hand, the Colombian Constitutional Court in 2010 was able to stop President Uribe re-writing the constitution and removing presidential term limits, which was quite an achievement.

This juxtaposition of functional and dysfunctional elements is why Colombia is referred to as an “orangutan in a tuxedo”; the orangutan signifies extraction while the tuxedo signifies, if not inclusivity, at least functional institutions which create some prosperity. The fact that the tuxedo exists and operates is why Colombia is much more prosperous than Syria.

Syria is a much more viciously extractive regime under the control of a family and its minority ethnic group, the Alawis. The majority of the population has little security of property rights and limited access to public services or education. The situation in Yemen is even more dire. Extraction is just much more extreme in Syria and Yemen than in Colombia, so it should be no surprise that Syria’s and Yemen’s extractive institutions have condemned their population to much more abject poverty than those of Colombia.

Second, as we discuss in the book, extractive growth can take countries quite far — witness how much more prosperous the average Chinese is today than 30 years ago. But then, what are the factors that make extractive growth possible? We emphasize two preconditions for extractive growth.

The first precondition for extractive growth is some degree of state centralization. Most nations in Africa, for example, have not achieved sufficient state centralization to permit extractive growth. Afghanistan and Yemen are obvious non-African examples here. In fact, in many countries that gained independence, there was a rolling back of whatever degree of state centralization there was under colonialism, and state institutions were built only gradually as chaos and instability subsided. Colombia is a case in point. The inclusive elements of its institutions did not emerge overnight. There was no economic growth for 70 years after independence and the peculiar mix of inclusive and extractive emerged after a series of critical junctures; a civil war which ended by centralizing power with a new constitution in 1885; the take-off of the world coffee market in the 1890s giving elites an incentive to promote some reforms, such as building infrastructure; and attempts to structure institutions to avoid further civil wars (see this paper). Yemen and Syria are in the midst of instability, and likely to remain that way for quite a while. For example, if Alawi rule is finally overthrown in Syria, we may then expect a new regime that gradually achieves some degree of state centralization and hopefully also more inclusive elements. Even if this doesn’t take 70 years as in Colombia, it will certainly take more than a few years.

The second precondition for extractive growth is an elite that is not threatened by growth, creative destruction and some institutional opening. China started its rapid growth only when the new leadership under Deng Xiaoping decided that they could hold on to power — and in fact strengthen their power — while at the same time reforming economic institutions and encouraging economic growth. Many segments of the business and political elite in Colombia are similarly vested in economic growth — both because they own some of the businesses that will be the main beneficiaries of this growth and because, despite all of the electoral problems in many parts of Colombia, national politicians who deliver economic growth are more likely to get reelected. The situation in Syria is again very different. The Alawi elite has consistently opted for extreme repression and even shunned private-sector activity partly because they haven’t seen any institutional opening or independent economic activity as inimical to their interests.

That being said, we do not want to imply that we have a full understanding of when a country is able to embark upon a course of extractive growth. Why is it that, for example, China and Vietnam have been able to do so, while North Korea has not even tried? Part of the answer may lie in the fact that in North Korea, the dictatorship is identified with the Kim family, and an about-face, like the one that Deng Xiaoping engineered after Mao’s death, is not possible. But still, there are as many unanswered questions here.

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