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Thursday
Oct312013

David Cameron's Speech to Open Government Partnership Summit

Prime Minister David Cameron’s speech can be found here.

We are delighted to see the Prime Minister emphasize the importance of inclusive political institutions. He even went further and recognized that making political institutions inclusive is not the natural instinct of politicians (stating that “Transparency brings risks”).

In fact, many politicians and elites actively work to maintain extractive institutions in place.

This will not change overnight, but more political and intellectual leaders emphasizing the importance of inclusive institutions and the role of politicians and elites in creating and maintaining the institutions that are at the root of much of the poverty around the world is a very very important first step.

Tuesday
Oct292013

What Are Institutions?

The explanation of comparative economic development set forth in Why Nations Fail is based on institutions, particularly the consequences of different sets of political and economic institutions. Though we provide a great deal of evidence to support this idea, no theory can explain every single episode from word history and there are always going to be counter-examples.

One proposal for a counter-example comes from the research of Peter Blair Henry and Conrad Miller (2009) “Institutions versus Policies: A Tale of Two Islands” published in the American Economic Review Papers and Proceedings (a longer version of the paper is available here).

They argue that the massive divergence of economic performance between Barbados and Jamaica since independence is such a counter-example to the notion that institutions matter. This is because both countries had the same colonial history with identical institutions at independence and hence this cannot explain why Barbados was only $1,000 per person richer in 1960 but over $5,000 per person richer today. They propose that instead of institutions being important in this case “the macroeconomic policies that governments choose to implement may exert just as much (or more) influence on the trajectory of their economies as the broader institutional framework within which those policy decisions take place.”

But in closer inspection, it turns out that the economic and institutional history of Barbados and Jamaica is far from being a counter-example to the main thesis of Why Nations Fail.

Though Henry and Miller focus on several types of institutions, for example, the inheritance of the English Common Law system, this is not something we have argued to be important in Why Nations Fail. In fact, our academic work with Simon Johnson “Colonial Origins of Comparative Development” and “Unbundling Institutions” has found this not to be important for long run development. There is no surprise there from a historical viewpoint. The United States and New Zealand were colonized by the British, but so were Guyana, Sierra Leone and Malawi, three somewhat less successful economies.

So what sorts of institutions did we emphasize? Not the written aspects of the constitution such as whether or not there is a parliamentary democracy, another thing that Henry and Miller focus on. Those things can be important, but the types of institutions that influence the political and economic incentives in society can be very different. For example, in the first chapter of Why Nations Fail, we emphasized that the distinctive economic performance of the United States was created by the US Constitution with its checks and balances and separation of powers. But we also argued that this document was an outcome of a set of political institutions that had already been established during the colonial period. A further illustration from the same period that other types of institutions matter is the two-term limit for presidents in the United States. This was not part of the Constitution. Rather, it was established as a social norm by George Washington when he decided not to run for a third term. The social norms worked form 150 years until Franklyn Roosevelt violated it. The role of the Supreme Court in assessing the constitutionality of legislation was not in the Constitution either, but likewise emerged as a social norm after the landmark Marbury versus Madison case in 1803.

In our post last week about Cows and Capitalism, we pointed out that social norms, like the one in Lesotho that cash could be converted into cows but not vice versa, counted as institutions according to the definition we used. In this case the social norm that Washington set, for example, clearly created incentives and constraints for future US presidents that influenced their behavior. That’s what institutions do.

How was it that the United States came to adopt such institutions?

As we argued in the first chapter of Why Nations Fail, this was not because of some particular British history, but because of the nature of early colonial society and the opportunities and constraints it faced when it formed. The Jamestown colony and what followed did not slavishly implement some model of what British colonial society should be, though they did try. Instead something very different emerged where political power was much more inclusive and so were economic institutions. Some of these institutions were indeed what might be called social norms, but that doesn’t make them any less powerful.

A contrast with Latin America is instructive. One of the most powerful social norms which still guides much of life in Latin America dates back to the colonial system where it was known as “obedezco pero no cumplo,” or “I obey but I do not comply”. This was the adage used by Spanish colonial officials to refer to their attitude towards laws emanating from Spain and still characterizes many attitudes towards laws in Latin America today. Why would such a social norm emerge in Latin America and not in North America? We know of no academic study of this but one reason might have been that unlike the British crown that extracted little out of North America, the Spanish crown benefitted hugely from flows of gold and silver. Thus they were in continual conflict with local elites one who would grab and benefit from these resources. Thus colonial elites pretended to obey but tried to undermine the intent of laws from Spain.

So in what sense might Barbados and Jamaica have had different institutions and how did they matter for economic growth?

To see this let’s first point out that as Noam Yuchtman of the Haas School of Business at UC Berkeley and James Robinson discovered in ongoing unpublished research: the puzzle is in fact much greater than Henry and Miller argue. Today income per capita levels in Jamaica are lower than they are in Barbados, but in 1838, they were much higher in Jamaica. The date 1838 is significant because it marks the end of the 4 year apprenticeship period which follows the 1834 freeing of slaves in the British Empire. After 1838 ex-slaves were really free. Before 1834, in both Barbados and Jamaica they had labored in sugar plantations. After 1834, what were the ex-slaves to do? In Barbados there was essentially no land to do anything. Migration off the island was illegal. The only option was to go back and work as “free” laborers on the plantations. But Jamaica was much bigger with a mountainous interior where there was the possibility of living an autonomous life free from plantation work. So in Jamaica the ex-slaves had an “outside option,” in Barbados they didn’t.

The first result of this was that wages were much higher in Jamaica because after 1838 there was a big fall in labor supply to the plantations and white owned businesses. But the rulers of Jamaica were not content to take this sitting down. In his famous paper on the origins of slavery and serfdom, “The Causes of Slavery or Serfdom: A Hypothesis”, Evsey Domar argued that it was exactly in situations where market wages were high that there would be a high incentive to repress and coerce labor (see this paper by Daron Acemoglu, Alexander Wolitzky for a formalization of this idea). This was exactly the case in Jamaica after 1838. Yuchtman and Robinson document this through violations of the Masters and Servants Acts that were designed to block competition in the labor market and keep wages down. Prosecutions under these acts were intense in Jamaica, absent in Barbados. One thing that made the acts very powerful was that nearly all labor contracts were verbal and could be invoked on almost any ground. For example, a law passed in Jamaica in 1842 workers convicted of ‘misconduct, miscarriage, misdemeanor, ill behavior in service’ could be sentenced to 30 days hard labor. Whipping was also a common offense. In effect, these laws and many like them gave employers almost total control over the “free” labor force. They were backed up by the state. As Nigel Bolland points out about the post emancipation period in his seminal 2001 book The Politics of Labour in the British Caribbean:

Throughout the British Caribbean the regular police forces themselves often showed characteristics of paramilitary organizations, with the emphasis on force rather than public service. Officers were generally white and of military background, and the ranks were frequently from other colonies and were stationed in barracks like troops in a colonial army to keep them from fraternising with the general public (p. 71).

The main point here is that this repression was much worse in Jamaica than Barbados. One result was rebellion, such as the Morant Bay uprising of 1865, on a scale not seen in Barbados.

This labor repression lasted well into the 20th century. In the late 1920s, for example, the colonial office started to consider some of the labor laws. Bolland (p. 149) quotes a colonial office official noting:

there are certainly serious drawbacks about leaving on the statute books legislation reaking of the taint of slavery, and providing for insolence, misdemeanor, miscarriage, ill-behavior and other obsolete and undefinable offences.” Jamaica, the official commented, had been “decidedly obstructive regarding the amendment of this labour legislation.

It was not until after independence that the Masters and Servants laws were repealed in Jamaica.

This greater history of labor coercion and violence has left a long shadow in Jamaica. When the first political parties formed in the late 1940s and 1950s, they immediately adopted confrontational and violent tactics and at independence in 1962 they inherited a state that was far more used to exercise violence and repression. It was not just the use of violence that was important but how the state governed and was constructed.

In Barbados the much lower levels of coercion and desire to control labor meant that the creation of a modern central state was more feasible. In Jamaica the continued rule of planters and their use of the state to coerce labor left the state more decentralized and more open to the use of informal methods to control the population. As we will see in our next post this different structure of the state has had powerful consequences in post-independence Jamaica.

Some evidence of the greater extent of violence for this comes from the history of homicide rates in Jamaica. This can be seen from the following figure that uses data from the United Nations (partly from the Office of Drugs and Crime (UNODC), and partly from the demographic yearbooks).

 

Unfortunately the data does not go back far enough but it shows that the homicide rate in Jamaica has typically been about 5 times higher than in Barbados.

This situation had also created a much more unequal society. For example, data from the UNU WIDER Inequality database suggests that at the time of independence the Gini coefficient (which measures inequality ranging from 0 perfect equality to 1 perfectly inequality) was around 0.40 in Barbados, but it was far higher, possible 0.57 in Jamaica, though measures of inequality are notoriously difficult to compare across countries. So, taken on face value, while Barbados has a level of inequality similar to Britain, Jamaica had one similar to Colombia.

The nature of the state, the history of violence and confrontation and the levels of inequality led to very bad economic policies in the 1970s as they have done all over Latin America. They also led to a great deal of extra-constitutionality, for example the National Emergency that was declared in 1976, which led to the arrest of 500 members of the opposition Jamaica Labour Party. This emergency rule also facilitated the re-election of Prime Minister Michael Manley’s People’s National Party.

Finally, Henry and Miller are of course right that one should pay attention to the independent effects of macroeconomic policies. This is particularly true of bad macroeconomic policies. As we’ll see in future posts, bad macroeconomic policies can block economic development in countries that have many aspects of inclusive institutions.

But economic policies don’t just drop out of the blue. They are chosen by governments and politicians whose incentives are determined by political institutions, that we talk rather a lot about in Why Nations Fail. This is why we do not make a big thing about the distinction between “institutions” and “policies”. Certainly at any one moment you can think that institutions are relatively slow moving, while policies can change much faster. All the same, they are ultimately determined by the same political forces.

So the argument that not institutions but macroeconomic policies distinguish Jamaica from Barbados is not compelling. Jamaica certainly has had worse policies since independence but as we have seen this was because it had more extractive institutions.

Wednesday
Oct232013

Cows, Capitalism and Social Embeddedness  

Economic theory sometimes portrays people as individuals making decisions completely divorced from their social context. A long tradition in other social sciences, particularly sociology, finds this unsatisfactory.

An example of the problems with examining an economic problem without thinking of how people are embedded in society comes from the new paper “Continued Existence of Cows Disproves Central Tenets of Capitalism?”by Santosh Anagol, Alvin Etang, and Dean Karlan.

The authors collected detailed data from the 2007 Uttar Pradesh Household Survey on two regions that asked questions on dairying behavior, in particular about livestock, farming practices, land holdings, assets. The survey provides detailed information on the costs (fodder, veterinarian, appreciation or depreciation of the animal, number of hours spent looking after the animals) and benefits (milk production, value of dung cakes etc.) of owning cows and buffaloes.

The authors then estimate the rate of return to holding cows and buffaloes. The results are startling. They find that it is -64% for cows and -39% for buffaloes.

What could explain such irrational economic practices? The authors consider a few ‘non-embedded’ ideas - measurement error, preference for home produced milk, preference for illiquid savings, labor market failures, and preference for skewness in returns. But none of these seems particularly compelling.

The final idea they come up with, social and religious values - Hindus regard cows as sacred–sounds more embedded, but then they quickly add:

most economic models of religion predict that customs derived from religion are either beneficial or strengthen the group, and this seems to do neither,

and of course buffaloes are not regarded as sacred.

What to conclude from this? Perhaps one explanation is to embrace the idea, once popular among some social scientists and recently gaining some further traction in more sophisticated forms among development economists, that poor people are irrational and cannot make decisions in their own best interests.

An alternative, however, is provided by the anthropologist James Ferguson in his book The Anti-Politics Machine that is a study of development problems in Lesotho in Southern Africa. There are many points to this book but one of them is to show that economic analyses that failed to take into account the social ‘embeddedness’ of economic behavior often come up with spurious interpretations of what is going on — and as a result, give irrelevant policy advice.

The problem in Lesotho, according to the World Bank (cited at length by Ferguson), was that there was an open range with too many cows and a serious ‘tragedy of the commons’. The interpretation of this by the World Bank was that:

cattle are not held by the Basotho solely for economic gain [and] traditional reasons for keeping cattle, e.g. brideprice, prestige, investment, etc. make farmers unwilling to sell their surplus unproductive stock.

This might be a bit like the idea that the rate of return to holding cows in Uttar Pradesh is low because cows have religious symbolism for Hindus.

The World Bank’s interpretation fits rather neatly into one type of idea about social embeddedness — what the sociologist Mark Granovetter calls ‘oversocialized’ as opposed to economic theory which is ‘undersocialized’ in his famous 1985 article “Economic Action and Social Structure: The Problem of Embeddedness”. In the oversocialized version, the Basotho are traditional ‘peasants’ who do not operate according to modern economic rationality so that social forces (like Hindus regarding cows as sacred) mess up a proper accounting according to costs and benefits. No wonder Lesotho is poor!

Ferguson tries to show, with some success, that this is all nonsense.

It is true that

the peculiarities of Sotho livestock keeping reflect a certain structuring of property which makes of livestock a special domain not freely interconvertible into cash.

But this social norm, which influences the economic rate of return, is not some irrational ‘traditional’ practice but is kept in place by a distinct set of interests. Ferguson first shows that (pp. 146-147):

There exists what one might call a one-way barrier: cash can always be converted into cattle through purchase; cattle however, cannot be converted to cash through sale except under certain conditions.

To understand this, it is important to understand two things:

1. There is nothing ‘traditional’ about the economy in Lesotho. Most of the men are away working in the mines in South Africa but since they intend to (indeed under the rule of Apartheid before 1994 were forced to) retire in Lesotho, their families are there and they wish to keep their rights in the local communities. Cows are an asset that can be lent to other people to build social relationships and standing within the community, which makes them a very attractive way to save for retirement.

2. Cows are men’s property, and as such women do not have access to them. Money is household property so women do have access to it. Therefore men save via cows to stop the women back home spending their retirement money.

So using your wages in Johannesburg to buy cows is a very effective way of keeping control of your resources and maintaining status and links to the community.

There is one more layer in this. Cows are used to pay bride-wealth to the parents of the bride when a son marries. This gives elders a type of claim over cows that they would not have over money, so they have an interest in seeing the system perpetuate itself.

So Ferguson’s argument is that the ‘tragedy of the commons’ and the resulting low rate of return to investing in cattle comes about because cattle are a very attractive way for men absent working in South Africa to save. The attractiveness results from the social norm that cows cannot be sold and they are not the property of women. Thus once invested in a cow, wealth is safe. Cows are also attractive as a way of building social relations in the local society which come in useful once you retire.

No doubt one could think of other social norms that are more efficient from an economic point of view, and Ferguson does not explain why these types of social norms emerged rather than others. But he does analyze convincingly the interests that keep these ones in place and lead to their reproduction. This is far from clear-cut because some people, women for instance, do not like the norms and try to change them.

From the point of view of Why Nations Fail, the types of social norms that Ferguson talks about are institutions — they are rules that people face that centrally govern their incentives and opportunities. Of course they are not laws or written in the Lesotho constitution, rather they are what Douglass North called “informal institutions”. But they are institutions, none the less.

In the next few blogs we will dig deeper into this issue.

Is this also what is going on in Uttar Pradesh? We have no idea but we cannot help but ask: wouldn’t it have been more interesting to place the negative returns to holding cows and buffaloes in a social (and institutional) perspective?

Tuesday
Oct152013

Democracy and Extremism  

An age-old question in political theory is how democracies, particularly democracies trying to be inclusive to use the terminology of Why Nations Fail, should deal with extremist groups.

If inclusiveness is about preventing the monopolization of political power in the hands of any segment of society or the sidelining of different opinions by the dominant ideology, perhaps giving some public space even to unsavory views and characters can be justified.

One can also argue that not providing such public space is likely to lead to a spiral towards greater extremism, and violence, among the supporters of such groups.

Take the Greek far right party, the Golden Dawn. Is the recent clampdown, triggered by the murder of the rapper and activist, Pavlos Fyssas, the right way to deal with it, or will it push some of its supporters to further extremism, for example as suggested by The New York Times?

There seems to be a lot of evidence that the Golden Dawn is not only a neo-Nazi party, as hinted by their swastika-like symbol, but it has also been involved in pervasive violence against immigrants and opponents, all sorts of crimes and racketeering.

But beyond this specific case of the Golden Dawn, for which sympathy would be hard to muster, there are two general reasons why democracies may need to take a hard line against extremist groups, even those organized as political parties.

First, these groups are often constituted around the intimidation of, and even violence against, marginalized groups, such as immigrants, ethnic, religious and sexual minorities, and sometimes civil society activists. Their unrestrained mobilization thus threaten to further reduce the political power and the voice of those who have already been sidelined by existing institutions and norms in society.

Second, their activities are often supported by elements within the security forces and even established political parties. It has now been documented that many in the police force and the military have tolerated, or even been complicit in, Golden Dawn’s violence against immigrants or perhaps also their more radical agenda, and several high-ranking police and military officials have now been removed from their posts because of their links to this organization.

In fact, the German experience with the rise of the Nazi party provides the starkest warning on how extremist parties receiving implicit support from a large part of the political and bureaucratic establishment can rapidly gain strength and even rise to a situation of national power. Richard Evans’s magisterial The Coming of the Third Reich links the ascent of the Nazis to the sympathies that many in the German establishment had to their cause and their animosity both against the Weimar democracy and the minorities.

Though the rise of a fringe extremist party to power appears — and of course is — far-fetched, it is not far-fetched to imagine that their intimidation could have a major effect on national politics and also start shaping the policy agendas of mainstream parties, particularly when there are many elements within the establishment sympathizing with their cause.

Lawful activism against these extremist groups from parts of the judiciary and the establishment opposed to such extremism may then be an important tool for democracy to defend itself and those that are already marginalized and mistreated by existing institutions.

Friday
Oct112013

Indirect Rule and Weak States  

In our post last week, we discussed how the unrestrained power of chiefs is keeping rural Sierra Leone poor. That’s not the only economic institution stocking the cards against development in Sierra Leone, however.

Sierra Leone’s state, like that of many other nations in sub-Saharan Africa, is pathologically weak, unable to provide the most basic public goods or even keep a minimum of law and order. What explains this weakness of the state or the extreme lack of state capacity?

There has been no shortage of explanations. Jeffrey Herbst in his important book States and Power in Africa suggested that the African state is weak because African polities did not engage in the type of strong inter-state warfare and competition that European nations underwent, and linked this to the low population density in Africa, resulting from its geography and ecology, making the competition for land less severe. Alternatively, one could extend the arguments of Paul Lovejoy in Transformations in Slavery: History of Slavery in Africa or Nathan Nunn’s work to relate the lack of development of state capacity in Africa to domestic or trans-Atlantic slavery.

Frederick Cooper’s thesis probably has even greater validity. In Africa since 1940: The Past of the Present, he argued that colonial states developed as “gate-keeper states” which sat on the coast and were only interested in ruling and extracting natural resources, not building the institutions required to develop the colony. Such states persisted after independence when they were taken over by Africans, and naturally led to states with little capacity to rule over to the territory they control.

Perhaps the most intriguing perspective is that of Mahmood Mamdani in Citizen and Subject: Contemporary Africa and the Legacy of Late Colonialism. Mamdani suggests that African post-independence institutions have been shaped by colonial indirect rule, which delegate chiefs to run the daily lives of colonial subjects on behalf of colonial authorities. Crucially, indirect rule made chiefs mainly accountable to the colonial authorities and even more unaccountable to their people than they were before. This made them even more despotic and less subject to checks by and communication with the society over which they ruled. This unaccountable, despotic behavior persisted after independence and became the basis of African states. Extending this argument one could link the inability of the states to build capacity to provide public goods or enforce laws to their lack of legitimacy and accountability, and their focus on despotically look after the interests of the elites controlling the state.

In a short paper we have written with Isaías Chaves and Philip Osafo-Kwaako for an edited NBER volume, we argue that the legacy of indirect rule in sub-Saharan Africa is more complex.

Mamdani’s perspective has a lot of validity for Sierra Leone. Indirect rule persisted in Sierra Leone because the post-colonial state was largely created and then subsequently controlled by the traditional elites who were empowered by, and then did the daily running of, the indirect rule system. These traditional elites, for example, formed the first political party and dominated late colonial and post-colonial politics in the country. This enabled the institutions of indirect rule, under the control of traditional elites, to re-create themselves after independence and the traditional elites to capture the central state.

But the resulting state was weak and ineffective for several reasons. To start with, because indirect rule by traditional elites provided little accountability for rulers, those in control of the central state were simply encouraged to extract rents from natural resources and agriculture and to chronically under-provide public goods. In addition, as we saw in our last post on Sierra Leone, the local state was based on lineages and local ruling families, and this made the central state also patrimonial and thus in consequence, weak. It also made power rest at the local level, making it more difficult for a national identity and powerful central state to emerge. Finally, the indirect rule system, which delegated all power to ruling families and elders, also made it difficult for the central state to establish a monopoly of violence because it had created an underclass of “lumpen youths” alienated from the society and ready to engage in violence on behalf of state or non-state actors, and traditional elites were very willing to use this type of violence for their benefit.

But this path is very different from the one we observe another colonies that were also ruled indirectly, most notably Ghana and Uganda. What differentiates these from Sierra Leone is the presence within their borders of a dominant, powerful and to some degree politically centralized pre-colonial state — the Asante in Ghana and Buganda in Uganda. These pre-colonial states significantly altered the distribution of power within the system of indirect rule. Whereas in Sierra Leone the British had to create the ruling families and increased the power of paramount chiefs, they were already dealing with powerful kings in the Asante and Buganda, and they happily worked and conspired with them.

After independence the King of Buganda, the Kabaka, became president of the newly-created nation of Uganda. But this power also created a problem for traditional elites. They were neither the instigator nor the main driver of independence movement, and the leaders of the movement, often located in urban areas with roots in professional occupations, did not trust them and feared their powers. In Uganda the first Prime Minister Milton Obote, for example, did not wish to rule via the Buganda chiefs, and when he had the opportunity, he forced the Kabaka into exile and changed the constitution to strip him of his powers.

Perhaps its first paradoxically, this implies that the greater power of traditional elites in Uganda, and also similarly in Ghana, made it more attractive for the post-independence leaders took dismantle the institutions of indirect rule and marginalize traditional elites.

Of course, Ghana and Uganda have had their own political problems. Once indirect rule was dismantled, the military became more powerful and military strongmen, Ignatius Kutu Acheampong in Ghana and Idi Amin in Uganda, were able to overthrow civilian governments and rule despotically and kleptocratically. Nevertheless, the extent of state weakness appeared different than that in Sierra Leone, and the conflicts did not boil into a deadly civil war as they did in Sierra Leone.

Whether this thesis can help explain the differential post-independence political dynamics across Africa nations remains to be investigated. But it does suggest that, though the indirect rule is probably an important reason why the Sierra Leonean state is so weak, its implications in other parts of Africa appear quite different.