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Why Nations Fail in Mexico  

If there is one country in Latin America where you might have thought the analysis of Why Nations Fail was relevant, it would be Mexico. In the first chapter of our book we traced the economic and political history of Mexico and showed how and why it diverged from that of the United States. We ended the chapter with a discussion of how the difference between how Carlos Slim made his money (monopolies) and Bill Gates made his money (innovation) is telling about the economic problems of Mexico.

This doesn’t come as news to most Mexicans, though it does come as a surprise to Bill Gates apparently since he has recently claimed that Carlos Slim was good for the Mexican economy.

Last year Mexicans elected a new President Enrique Peña Nieto who took office in December. There were quite a few skeptics about whether Mr. Peña Nieto was up to the job (he made several highly publicized gaffes during the campaign). But since getting into power he has turned out to be something quite different from his detractors.

First, he immediately signed a multiparty pact with the opposition parties the PRD and the PAN (the party of outgoing President Felipe Calderon). This “Pact for Mexico” outlined a large number of policy priorities, but one of the ones prioritized by Peña Nieto was educational reform.

Such reform faced a big obstacle in the teachers union headed by Elba Esther Gordillo known as “La Maestra” (the schoolteacher). La Maestra has used the union like a personal fiefdom for two decades, enriching herself and blatantly intervening in elections (the teachers count the votes in Mexico, which turns out to be particularly useful in close elections such as the one in 2006 when La Maestra backed President Calderon and he won a hotly contested election by a narrow margin – 233,000 votes).

Perhaps the most unfortunate aspect of all of this seems to be that the teacher’s union controls the hiring and training of teachers. One result is that Mexico has a terrible education system. Peña Nieto’s response to this obstacle was have La Maestra arrested for charges of embezzlement. Another priority was to completely re-vamp telecommunications regulation with serious attempts to increase competition and challenge Slim’s monopoly. The statements of the Finance Minister Luis Videgaray show clearly that the government understands the connection: less extractive economic institutions, faster economic growth and less inequality in Mexico.

How come there is now seemingly a move towards dismantling extractive economic institutions in Mexico?

Our framework in Why Nations Fail suggests one answer. Since 2000, Mexico has moved towards more inclusive political institutions, and one implications is mounting pressure to make economic institutions less extractive.

But history suggests this is the optimistic interpretation. Carlos Slim acquired his telecom monopoly during the Presidency of Carlos Salinas de Gortari. Salinas was seen at the time as a reformer, just like Peña Nieto, and was of course from the same party, the PRI. He brought a wave of “market reforms” to Mexico, like the telecom privatization. But this didn’t really change Mexican institutions. Rather, these reforms can be interpreted as an attempt by Salinas to develop a new political base by creating a group of wealthy oligarchs, politically beholden to him. In reflecting on this, it is good to ask who actually appointed La Maestra in the first place? (Answer: Salinas.)

So the big question for Mr. Peña Nieto is: a move towards inclusive institutions or the Iron Law of Oligarchy in action? Did he arrest La Maestra because he really wants to reform Mexico’s education system or is it because he’s mad at her for abandoning the PRI and backing Calderon’s PAN in 2006?


Efficient Organization among Pirates?  

In our last post, we discussed pirate democracy, based on Peter Leeson’s The Invisible Hook, a great and thought provoking read.

Our main argument was that democratic elections and checks on leaders that emerged in pirate ships illustrate a more general point: if we want to understand democracy, we should think not about the idea of democracy extending back to the Ancient Greeks, but about the incentives that democracy creates and the distribution of political power among different groups in society that underpins democracy.

We also questioned Peter Leeson’s interpretation, which explains the emergence of pirate democracy solely on the basis that this was the efficient arrangement for pirates — a specific instance of what we have dubbed elsewhere “the efficient institutions view”.

Peter Leeson has now followed up with a post, providing additional arguments supporting the idea that pirate democracy emerged because it was the efficient organization, and more generally defending the efficient institutions view.

Of course Leeson wrote the book on the subject, so we cannot disagree with the facts he presents.

Nevertheless, our interpretation differs.

First of all, we find the general presumptions upon which the efficient institutions view rests fairly unconvincing. What are exactly the forces that will ensure that institutions are efficient? And efficient for whom?

After all, Why Nations Fail is all about the ubiquity of extractive economic and political institutions that are blatantly inefficient. How can we understand, if not as highly inefficient for economic prosperity and for the majority of the population, regimes such as North Korea? We cannot appeal to their ephemeral nature easily either, since many of these are not exactly short lived. (Wonky note: here by “inefficiency”, we are not referring to Pareto inefficiency. Such regimes, under some circumstances, could lead to Pareto efficient equilibria given the existing set of economic and fiscal instruments. But they are “inefficient” from the viewpoint of maximizing the economic surplus in society or the size of the “economic pie” so to speak).

Second, there is a bit of an internal inconsistency to the efficient institutions view. Let us illustrate this with the example of pirates. Suppose that in fact democracy was adopted by pirates because it was the “efficient organization” for them. That would presumably mean that it furthered the ability of pirates to raid and ransack as many ships as possible. But is this really efficient from the viewpoint of society? Most people would presume that the damage that pirates cause is much greater than the benefits to themselves, especially because the prospect of piracy is likely to discourage commerce and investment. So in a world of complex economic, social and political relationships — i.e., the world we live in — even if efficiency at the level of some subunit can be ensured, this will typically be at the expense of inefficiency at some more aggregate level. But then how can we talk of efficient institutions prevailing in the society at large?

Third, Peter Leeson’s superior knowledge on this topic notwithstanding, we did not find his interpretation that compelling. Leeson notes that a democratic organization, with a more equal distribution of political power and better checks on leaders, was efficient for pirates. Probably right. But the same reasoning suggests that it would have also been efficient for many other businesses and social and political organizations. But we see nondemocratic organizations persist in many of those spheres. So where are the efficient institutions?

Our hypothesis— truly nothing more than a hypothesis, since we are not experts on the history of pirates — is that what distinguished pirates from much of the rest of society at the time was the distribution of de facto political power (in fact, the distribution of de facto political power was at the center of our theory of democracy in our previous book, Economic Origins of Dictatorship and Democracy, and we are still keen on this idea).

The lower strata of society until the 19th century did not have much de facto power pretty much anywhere else in the world around that time, so they could not make effective demands for a level playing field or for direct economic transfers or for political change meant to support these economic outcomes. As a result, there was no need for those currently holding de facto and de jure power to make concessions to them — particularly political concessions to further increase their political power and participation.

This was possibly different among pirates for the reasons that Leeson masterfully recounts: all pirates had cutlasses.

Now Leeson is right that there are other factors that may have made a democratic organization less costly among pirates than for other businesses. For example, a democratic organization on the factory floor, by shifting the ex post say on pay and profits to workers, may make it harder for the ex ante investments of the entrepreneur to be rewarded.

But in contrast to this reading of the purely efficiency-based view, workplaces have also become more democratic over the more recent past. Most notably, trade unions in many countries had a lot of say on many decisions of the factory throughout the latter half of the 19th century and much of the 20th century. But perhaps even more telling are economic cooperatives. These, following the Rochdale Principles named after the Rochdale Society of Equitable Pioneers founded in 1844, typically specify “democratic member control” as a defining characteristic. We would also hypothesize — once again without having studied the history of such cooperatives in detail— that the more democratic nature of today’s workplace and the much more democratic organization of cooperatives isn’t just because ex ante investments of entrepreneurs have become less important, but also at least in part because the de facto distribution of power on the factory floor has shifted towards trade unions and workers.


Pirate Democracy?  

In our discussion of Berber society, we discovered that the Berber’s of the High Atlas Mountains democratically elected secular political leaders and even practiced a form of checks and balances by rotating the office in strict order across clans.

Another fascinating case of unlikely democracy is 18th century pirates. You might have imagined that a tough pirate like Bartholomew Roberts would have bullied and tyrannized his way to power. Not quite. In fact he needed a campaign manager “Lord” Dennis who entreated the crew

who by his Counsel and Bravery seems best able to defend this Commonwealth, and ward us from the Dangers and Tempests of an unstable Element, and the fatal Consequences of Anarchy

Answer: Roberts.

Instead of grabbing power, Roberts was elected on the basis of one-pirate-one-vote.

In his fascinating book The Invisible Hook, Peter Leeson shows that such democracy was the norm amongst pirate crews who ravaged the Caribbean and other parts of the world in the 18th century.

Pirate crews not only elected their captains on the basis of universal pirate suffrage, but they also regularly deposed them by democratic elections if they were not satisfied with their performance.

Like the Berbers, or the US constitution, pirates didn’t just rely on democratic elections to keep their leaders under check. Though the captain of the ship was in charge of battle and strategy, pirate crews also used a separate democratic election to elect the ship’s quartermaster who was in charge of allocating booty, adjudicating disputes and administering discipline. Thus they had a nascent form of separation of powers.

Leeson shows that these democratic procedures were sanctified in pirate constitutions that required unanimous support before they were ratified. The constitution ratified by the crew of Captain Robert, for example starts: 

I. Every Man has a vote in the Affairs of Moment; has equal Title to the fresh Provisions, or strong Liquors, at any Time seized, and may use them at Pleasure, unless a Scarcity make it necessary, for the Good of all, to vote a Retrenchment.

So pirate ships were nascent democratic societies. But they were not just emulating British democracy. Nor did they slavishly adopt it from the Ancient Greek idea of democracy.

Most pirates were men and all adult males did not get the vote in the Representation of the People’s Act in 1918. Of course Britain did not invent universal male suffrage then. Demands for it go back at least to the Diggers and Levellers, radical groups that emerged during the English Civil War of the 1640s.

And of course democracy as a method of making decisions goes back far before that, as indeed does the separation of powers (the principles of which were well understood by whoever it was that designed the Constitution of the Roman Republic as we discuss in Why Nations Fail).

Now it could be that everyone was borrowing all of these great political ideas from the Greeks, but this doesn’t sound very likely. Pirates weren’t exactly well read in the canons of Greek political philosophy. Nor were the Berbers.

Moreover, as we will see when we return to this topic in the coming weeks, the attribution of the invention to democracy to the Greeks flies in the face of a vast amount of empirical evidence. In fact democracy was invented independently in many parts of the world on many different occasions just like farming was.

There is a troubling aspect about Leeson’s account of pirate democracy, however. This relates not to his facts, but to his explanation for why pirates used democracy. He seems to accept what we have called the “efficient institutions view” namely that pirate democracy and constitutionalism arose as an efficient solution to a principal agent problem (namely that pirates were worried that if they delegated power to their captains, power would be abused).

This positive theory of institutions of course is very different from that proposed in Why Nations Fail or our previous book Economic Origins of Dictatorship and Democracy.

Our approach is based not (certainly not) on the idea that democracy arose to solve some inefficiency. Rather, in our theory, it is all a matter of power. Democracy arises when nondemocratic elites are forced to cede power to the previously disenfranchised. This could improve economic efficiency, but it need not. Promoting efficiency is just not the motivation for democrats or their opponents.

Leeson doesn’t present any evidence on why pirates chose democracy and the separation of powers, though his argument will appeal to economists wedded to the paradigm of the Coase Theorem which applied in this context would mean that in the absence of (ill defined) transaction costs, the organization of pirate institutions would be economically efficient. (For an explanation of why the Coase Theorem should not apply to politics, see this paper).

We don’t have any evidence either on why pirates chose the institutions they had but Why Nations Fail is littered with examples of institutions from all over the world that cannot possibly be efficient. This at least suggests that assuming that pirate democracy promoted efficiency is dubious.

More likely, it arose because the distribution of de facto power was fairly equal among pirates. Maybe it was one-man-one-cutlass that drove one-man-one-vote and quite possibly was also the reason why income distribution was so compressed in pirate society.

On Roberts’ s ship:

The Captain and Quarter-Master [were] to receive two Shares of a Prize; the Master, Boatswain, and Gunner, one Share and a half, and other Officers one and a Quarter.

Democratic. Yes. Egalitarian. Not quite.

(Still one could advance other hypothesis about the roots of pirate democracy, the modernization hypothesis or the view that institutions just flow from human capital. Perhaps it was the high human capital levels of pirates that bred democracy. We leave this hypothesis to others to explore.)


The Reason Nations Fail

Enough said.

(From the New Yorker)


Clansmen into Englishmen?  

So is there hope for the emergence of a well-functioning, rational state in the Middle East? In the Congo?

The model for state building proposed by the great German sociologist Max Weber emphasizes the establishment of the state’s monopoly of violence and the transition from patrimonial to rational legal authority.

One of the most critical processes associated with these transitions was the role of the state in creating a “nation”. A famous study of this is provided by the historian Eugen Weber whose book Peasants into Frenchmen studied how the French state based in the Paris basin spread out throughout France, and gradually imposed, particularly via schooling, a French identity that had previously not existed in most of what is now France. The state came first and then a French identity followed.

This has become the canonical model of the emergence of modern institutions and the modern state. Many social scientists, on the basis of this analysis, now think that much of sub-Saharan Africa after independence was doomed to chaos and political instability because the countries lacked national identities. There were no Congolese, only Luba or Lele. The few odd cases of stability, such as Botswana, could be reconciled by pointing out that modern Botswana comprises the territory occupied by a number of related Tswana tribes who were able to similarly impose a national identity (after independence only English and Setswana were taught, not the many other languages then in use).

But is this “national identity”-building path to the modern world the only possibility? Can we not have modern institutions and the modern state without such a national identity? 

Consider the curious case of Scotland. In the Medieval and Early Modern periods the English state expanded and took over Wales, Scotland and Ireland. Scotland merged with England officially in 1707 with the Act of Union, a merger that had been on the cards since the accession to the throne of England James I, king of Scotland, in 1603 (Elizabeth I died without children and James was descended from one of Henry VIII’s daughters). It was only after 1745 and the attempt by Bonnie Prince Charlie (the ‘Young Pretender’) to re-claim the throne lost by his grandfather James II in the Glorious Revolution of 1688 that England decided to rule Scotland directly. English administration was extended to Scotland, the clans (lineages rather like those of the Berbers in Morocco) were disarmed. It was even made illegal to wear highland clothing like kilts.

So England has controlled Scotland for 270 years, and has done so through a modern state, a perfect specimen of the Weberian rational state with a monopoly of violence. But next year there will be a referendum on whether or not Scotland will become independent. So after 270 years of direct rule by England, it turns out that there is no British nation state and no British national identity let alone a successful imposition of English identity on Scotland.

This suggests that perhaps the idea that a pre-requisite for a modern state is a homogeneous “nation” is exaggerated. After all, such a homogeneous nation is not a general pattern even in Europe (think of Spain). If the English couldn’t achieve that after 270 years of trying in Scotland, what hope have the Congolese or Nigerians?

But on the positive side, maybe they don’t need to achieve this, again as the English example suggests.