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Why Nations Fail, David Cameron and the Golden Thread of Development  

Let us continue our detour away from patronage politics for a while longer to write a few things about some debates on economic development in the British political circles.

The British Prime Minister David Cameron has a new concept he is trying to use to bring new ideas to the table in solving the problems of poor countries. He calls it “The Golden Thread of Development” (his ideas are discussed in this recent op-ed in the Wall Street Journal).

What is this mysterious sounding Golden Thread? In Cameron’s words:

we … need to tackle the causes of poverty, not just its symptoms. And that means a radical new approach to supporting what I call “the golden thread” of conditions that enable open economies and open societies to thrive: the rule of law, the absence of conflict and corruption, and the presence of property rights and strong institutions. It is only when people can get a job and a voice that they can take control of their own destiny and build a future free from poverty.

Eradicating poverty requires the growth that is fueled by open economies, and open economies are themselves best ensured by open societies: rights for women and minorities, a free media, integrity in government, and the freedom to participate in society and have a say over how your country is run. A genuine golden thread would tie together economic, social and political progress in countries the world over.

The Golden Thread therefore is an interlinked set of institutions which creates the incentives and opportunities which will generate economic growth. Interestingly, the emphasis here runs from open societies to open economies. Politics comes before and leads to economics.

Readers of Why Nations Fail and this blog will know that this is all music to our ears. To use our terminology, what David Cameron is arguing is that to have sustained economic growth and poverty reduction, what is required are inclusive economic institutions (“open economies”). But these don’t just spring out of nowhere, they are a result of inclusive political institutions (“open societies”). So far so good.

David Cameron also argues that in itself foreign aid, at least as currently structured, won’t do much to create inclusive institutions. But exactly as we argue in the last chapter of Why Nations Fail, and will discuss again in the next post, this is not an argument for cutting aid, since aid positively impacts the lives of many poor people. What is needed now is a practical agenda of how aid can be used to stimulate institutional reforms, an agenda which has the politics, as well as the economics of institutions at its heart. David Cameron’s brief article sketches some ideas about what these reforms might look like.

In Why Nations Fail when we discussed the central role of empowerment, we point out that this idea emanated not from academia but from international institutions like the World Bank. Now it seems the politicians, even Tories, are getting ahead of the curve as well!


China, India and All That

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.


The Transition to Programmatic Politics

In our last post, we discussed the political attraction of patronage politics to leaders bent on clinging to power or self-enrichment. But then, how is it ever possible to get a transition towards more inclusive, “programmatic,” politics?

Martin Shefter, whose work we discussed in our previous post, suggested some circumstances that made such a transition feasible. He distinguished between two types of political parties, those that were “externally mobilized” and those that were “internally mobilized”. Internally mobilized parties are those that emerge from inside a political system like the Liberal and Conservative parties in Britain. Externally mobilized parties are those that form outside of the political system, such as the Labour Party in Britain which came from the trade union movement. (There are of course hybrid cases where a movement mobilized outside the system strongly influences or even takes over established parties, similar to what happened with the Progressives heavily influencing the platforms of both the Democrats and Republicans, as we discussed in Chapter 11 of Why Nations Fail, and in this paper).

We have already met another example of such a party, the MAS (Movement Towards Socialism) in Bolivia (see here and here). Another good example which we discuss in the last chapter of Why Nations Fail is the PT (Workers Party) of Brazil. Both of these parties were started by trade unions and social groups previously uninvolved in formal politics, but decided to mobilize to influence politics.

Shefter argued that one can expect a transition from patronage to programmatic politics precisely when an externally mobilized party organizes and becomes influential (perhaps even winning power). There is a very good reason for this: the main spigots of patronage are government jobs and contracts, which, by definition, externally mobilized parties do not have access to (recent work by Horacio Larreguy provides evidence from Mexico supporting the idea that patronage politics is strongly linked to the control of government resources). Instead, these externally mobilized parties have to mobilize their supporters by ideological and universal appeals. Shefter suggests that once they adopt this strategy, they stick to it.

This seems a promising and empirically plausible idea, though the exact mechanism isn’t clear and Shefter doesn’t provide an explanation for why an externally mobilized parties can’t gain support by promises of patronage or why, once they get into power, they don’t switch strategy and indulge in patronage. But whatever the reason, as Shefter points out, the entry of such parties do seem to change politics, as illustrated by the entry of the Labour Party into British politics, which spearheaded a shift from the patronage politics of the Conservative and Liberal Parties of the “old corruption” style. It seems that the entry of the PT has unleashed similar dynamics in Brazil and the MAS may do likewise in Bolivia.

But the attraction of patronage politics, and the already-existing complex patronage machinery, means that the temptation will always be there for these parties to start using patronage themselves and for business-as-usual patronage politics to continue.


Patronage or Programmatic Politics?

Even in societies that have consolidated electoral democracy — a precondition for inclusive political institutions — remnants of extractive institutions often remain. One notable aspect of this is patronage politics (also called clientelistic politics), involving an informal exchange between a politician and citizens. Citizens vote for the politician or even turn out to demonstrations in exchange for patronage from the politician, which takes the form of providing jobs for the individual or members of his family, granting access to a resource such as land, or a service such as health care, or simply direct monetary or in-kind payments. As political scientist Martin Shefter put it in his classic paper “Patronage and its Opponents” :

A political party may employ one of two basic strategies in its efforts to attract voters, contributors, and activists to support its candidates. It may distribute divisible benefits – patronage of various sorts – to the individuals who support the party. Alternatively, it may distribute collective benefits or appeal to a collective interest in an effort to elicit contributions of money, labor or votes from its supporters.

By collective benefits Shefter meant something that benefits not just the individual himself but society more broadly. This includes provision of public goods or adoption of policies that improve living standards for the community at large. One problem even for democracies and inclusive political systems is that though from a social point of view it is desirable for the government to provide public goods, a purely rational politician often finds it more attractive to gain support through patronage.

The first scholar to understand the deep and perverse implications of this was Robert Bates, in his book Markets and States in Tropical Africa which is still one of the most important works in political economy in its ability to show how simple political reasoning turns economic relationships upside down.

Bates started with a puzzle: why was it that in Africa, a continent thought to have a comparative advantage in agriculture, governments discriminated against agriculture? It was already well understood that they did this through various means, for example, using marketing boards which were by law the only entity able to buy agricultural products. These boards paid farmers very low prices, far below international levels, and all but destroyed the price system, and thus sapped the incentives of farmers to invest or exert effort. Bates showed that this was all about politics. Marketing boards were in effect a way of levying punitive taxes on farmers with the resulting revenues going to subsidize urban elites and used (and often looted) by the government. More importantly, Bates illustrated more generally the political logic behind a whole gamut of “distortionary” policies. The crucial point was what looked like bad economics was really very good politics — for the politicians themselves and their survival.

Take overvalued exchange rates which made African goods expensive and imported goods cheap. This meant that imports exceeded exports and foreign exchange became a scarce resource that had to be rationed. It was of course the state and the politicians that allocated these rations — as a way of rewarding political friends, excluding political opponents, and making a good buck on the side. The distortions in the market artificially created a scarce resource which was a politically valuable tool to buy support.

The more general argument that Bates made, even if he did not put it this way, was that the provision of public goods, though it might be economically rational, was not politically rational. This was because public goods, by their nature, benefit everyone. But politicians did not want to benefit everyone; they wanted to benefit their existing or potential supporters, while excluding their opponents, something which providing public goods could not achieve.

Here’s one of many specific examples Bates gives. In Ghana in the 1960s, politicians began to see that paying farmers such low prices was leading to a collapse of the agricultural economy, particularly the critical cocoa sector that was Ghana’s main export crop. The sensible way to try to revive production would have been to raise prices or even better, let the price system work. But this would have been a “collective benefit” for cocoa farmers, benefiting everyone, including those who did not support the incumbent government. So that was out. Instead, the government decided to keep prices where they were and give out subsidized fertilizers to improve productivity. The advantage of this strategy wasn’t just in the continuation of the system based on the low prices and the rationing that they created, but also in the political benefits that the allocation of fertilizers would generate: fertilizer could be given to supporters and withheld from opponents.

Of course, Ghana in the 1960s was far from a consolidated, stable democracy. But even in a consolidated democracy such as Mexico, such patronage politics can prevail and it has a powerful political logic, in fact powerful enough to have kept the Institutional Revolutionary Party, the PRI, in control of Mexican politics for seven decades. It is obviously an impediment to inclusion, and often, the under provision of public goods is only one facet of the costs. Another is the almost complete inability of the electorate to hold politicians accountable when patron-client relationships are pervasive, which strengthen and deepen dysfunctional politics.

However, in the same way that extractive political institutions aren’t forever, neither is clientelism. In the next few blog posts we examine some cases where clientelism broke down and we study the lessons from this process.


Disrupting Dysfunctional Equilibria

In Why Nations Fail we characterize poor countries as being in an equilibrium where extractive political institutions lead to extractive economic institutions. To experience economic growth a country has to move out of this situation. It can secure growth, even in the short run, by moving economic institutions in a more inclusive direction, as China did in the late 1970s. For such growth to be sustained, however, it also needs to move to inclusive political institutions. In the book, we emphasized how institutional transitions occur at critical junctures which disrupt the balance of political power and often solve the collective action problems for those wishing to challenge extractive institutions.

In the next few blogs we examine what sorts of things, even “interventions”, might break up extractive equilibria. These may give hints about what types of policies might have similar effects.

Though in the book we presented our framework using a dichotomy between inclusive and extractive at a national level, in reality shades of grey are everywhere. Some societies are more extractive than others, and even within a broadly inclusive society there are places which are deeply extractive as the South of the United States was prior to the 1960s. Indeed, the story of the US South is a vivid example of how bottom-up discontent and movements combined with interventions from outside can help break up dysfunctional equilibria.

In this context, it is useful to recall that despite President Eisenhower’s claim that “law and force cannot change a man’s heart” — implying that there were deep cultural roots to the ‘Southern equilibrium’ — in fact law and force did exactly that (see our post on this). The Southern equilibrium was disrupted by such interventions as Brown versus Board of Education, and perhaps more centrally by such things as the Voting Rights Act, which politically empowered black voters.

This breaking of the “Southern equilibrium” is one example of a much broader type of change from which we might be able to learn how to make society more inclusive.

In the next few posts, we will focus on how dysfunctional political equilibria can be disrupted and broken, starting with the unraveling of clientelism.