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Thursday
May312012

The Rise of a Bolivian Broad Coalition?

Democratization in Bolivia briefly after 1952 and more persistently after 1982 did not create inclusive political institutions. For instance the 1955 Educational Reform code passed by the MNR was not designed to empower indigenous people but to assimilate and control them.

But something remarkable then happened in 2006. For the first time in its history Bolivia elected an indigenous president Evo Morales. A former coca farmer and union leader, Morales’s party MAS (Movement Towards Socialism in English) formed initially as a movement outside of the existing political system. They forged a road to power by effectively harnessing people’s resentment against the traditional political system and using mass collective action to force the system to change. When they got to power they spearheaded a re-writing of the constitution to make Bolivia a “Plurinational” State, recognizing the indigenous people for the first time and they introduced many measures meant to empower them and other discriminated minorities, particularly women. Central to this project were changes in the educational system with the new Avelino Siñani-Elizardo Pérez Education Law, named after the founder of a famous school for indigenous peoples, spearheading a mass change in the way the education system works to promote a more inclusive society. This includes the opening of three new indigenous universities.

The MAS is not simply a party of trade unionists or indigenous peoples. The vice president Álvaro García Linera is a former Marxist guerilla. As well as former guerrillas and left-wing groups, the MAS includes intellectuals and parts of the middle class. In consequence, their policy platform has included not just the promotion of the disempowered, but also nationalization, particularly of foreign owned natural resources, and also attempts to develop an industrial policy.

One might be skeptical about whether or not some of these measures will lead to more inclusive institutions and to good economic outcomes, and we are indeed very skeptical (as our discussion of industrial policy here and our discussion of Argentine nationalization here illustrate).

But there is also a different way of looking at it: perhaps these distortionary policies are inevitable when the governing party is a broad coalition difficult to hold together — and starting on their weak institutions. Perhaps President Morales is adopting these policies to satisfy the many constituencies that are part of this coalition (and of course to hold onto power).

Yet the possibility that the MAS constitutes a broad coalition of the type we analyzed in Why Nations Fail suggests the possibility that there may at last be a real institutional transition from extractive towards inclusive institutions in Bolivia. More evidence for this is that though some criticize Morales for wanting to emulate Hugo Chavez, presidential term limits have not been dismantled in Bolivia as they have in Venezuela.

More importantly, because he relies on this broad coalition, Morales cannot do whatever he likes — and perhaps as a result, the political equilibrium is shifting and the distribution of political power is becoming much more equal. For example, popular protests emerged over the new system introduced by the constitution for the appointment of top justices in 2011. Though the justices were to be chosen by a popular vote, the MAS controlled the nomination of the potential justices in the national congress (previously the judges were simply chosen by congress so the new system is an improvement on the old). The result was a mass campaign to “anula tu voto” (cast a blank ballot) to limit what the MAS could do. The next photo, taken in November 2011, shows some of the graffiti which suddenly appeared everywhere in La Paz. In the referendum over 60% of ballots cast were spoiled or blank, signaling how Morales has started to function in an environment in which he is more constrained than previous Bolivian presidents.


Though we are very much at the beginning of the process and things can change quickly, there are now some signs that the type of broad coalition that led to institutional change elsewhere in the world may have started forming in Bolivia. That is an exciting prospect, one for which it is perhaps worth putting up with some showy nationalizations. 

Monday
May282012

Shock Therapy on the Altiplano

In our last post we explained how the Bolivian Revolution of 1952 was an example of what the German sociologist Robert Michels called the Iron Law of Oligarchy. Michels noted in his book Political Parties

society cannot exist without a …dominant… or… political class, and that the ruling class, while its elements are subject to frequent partial renewal, nevertheless constitutes the only factor of sufficiently durable efficacy in the history of human development. [T]he government, or, … the state, cannot be anything other than the organization of a minority. It is the aim of this minority to impose upon the rest of society a “legal order” which is the outcome of the exigencies of dominion and of the exploitation of the mass … Even when the discontent of the masses culminates in a successful attempt to deprive the bourgeoisie of power, this is … effected only in appearance; always and necessarily there springs from the masses a new organized minority which raises itself to the rank of a governing class…” (pp. 353-354).

The “new organized minority” in Bolivia in 1952 was the MNR. In 1985 they were back in power in the form of President Víctor Paz Estenssoro, one of the founders of the party who had been president between 1952 and 1956 right after the revolution. In 1985 the Bolivian economy was in a mess. Not only were basic economic institutions extractive but there was hyperinflation. Paz Estenssoro aimed to deal with poor economic performance and inflation with a drastic “shock therapy” stabilization policy. As we emphasize in Why Nations Fail there is a great deal of variation across countries in the form of extractive institutions. Many of these are referred to by economists as “bad policies”. The Paz Estenssoro government, with the aid of then Harvard economist Jeffrey Sachs, aimed to address these bad policies. In this they anticipated the Washington Consensus.

In the Bolivian case the attack on bad policies was enshrined in Supreme Decree 21060. This decree implemented a massive devaluation of the currency, deregulation of price controls and massive downsizing of the public sector including a closing of the government owned tin mines and the abolition of government trade restrictions and cuts in trade taxes.  When the Bolivian Labor Federation (COB) called for a general strike against Decree 21060, the government declared a state of siege and exiled 175 labor leaders to a remote jungle prison camp.

Unfortunately, as with the Washington Consensus, the attempted policy reforms in Bolivia were conducted without any regard to the political problems which had created the policy distortions in the first place. Following the dominant tradition in economics, Jeffrey Sachs arrived with the implicit theory that Bolivians were ignorant of what good economic policies were. It was just a matter of getting it right — of course with good advice from clever economists. But as is often the case, policy distortions weren’t just there because people were stupid.

In fact, the distortions that the Bolivian government addressed were the tip of the extractive iceberg — the most crucial part of that iceberg which went unaddressed being the deep-rooted discrimination against indigenous people, probably 60% of the Bolivian population. The 1952 revolution had done little to empower Bolivia’s indigenous people. MNR also had little interest in this after 1985.

There should be no surprise here. Echoing the Iron Law of Oligarchy, Paz Estenssoro and the MNR, the exact “organized minority” who had taken over Bolivian society after the revolution, had no interest in changing the extractive system. They just wish to stabilize it at the edges so that it would and do it themselves at the helm. This they could do because even if they gave up one bad extractive policy, they could simply exchange it for another one and carry on with the extractive system.

In our paper with Simon Johnson and Pablo Querubín “When Does Policy Reform Work?”, we analyzed exactly this process. We explained why policy reform, against the background of unchanged political institutions, may create a seesaw effect, whereby the reform of one distortionary, extractive policy leads to the rise of another. We then illustrated these ideas with central bank independence, adopted enthusiastically by many countries with the encouragement of international organizations since the 1990s. Central bank independence, except in places such as Zimbabwe where it doesn’t mean anything at all, does take away some of the tools that politicians under extractive institutions can use for clientelism or for personal enrichment. But if their incentives and constraints facing them and the political elites are unchanged, they will often find other tools to achieve the same objectives — and these other tools may sometimes be even more distortionary. So with more constraint on monetary policy after central bank independence, many countries with weak institutions start running bigger budget deficits.

The situation in Bolivia was similar. Extraction continued, and so did underdevelopment.

Thursday
May242012

The Bolivian Revolution

In Why Nations Fail we have emphasized that the roots of economic divergence between North and South America lie in the different ways that colonial institutions formed. Latin America is poorer today because the Spanish developed economic institutions designed to exploit indigenous people. Nowhere was this system more pernicious than in Bolivia. The “old regime” based on the extractive colonial institutions lasted until 1952 when a revolution, masterminded by a political party, the MNR (Movimiento Nacionalista Revolucionario – National Revolutionary Movement) overthrew the traditional political and economic system. As in many Latin American countries, in Bolivia the rise of new interests and cleavages in the early 20th century had led existing elites, often rurally based, to enter into a governing coalition with the military. This coalition was demolished in Bolivia in 1952.

The three great families that owned the tin mines were expropriated and the mines nationalized. All of the great haciendas and landed elites were expropriated and the land distributed to the peasants. The coalition which had represented these interests in politics, known as La Rosca, was displaced, universal suffrage was introduced, the military was disarmed, and pongueaje, the last form of colonial unpaid labor service, was abolished.

On the face of it this political revolution and the changes in economic institutions which it apparently brought ought to have led to a dramatic change in the development prospects for Bolivia. But it didn’t. The next figure from Jonathan Kelley and Herbert S. Klein’s seminal book Revolution and the Rebirth of Inequality shows the impact of the revolution on inequality. By 1960, 8 years after the revolution this had fallen by about 30%.

But the figure also shows that by the late 1960s inequality had increased back to levels which were greater than those before 1952!

What went wrong?

In Why Nations Fails  we also emphasize that there is always conflict over institutions, and extractive institutions will be challenged not only by those who lose out from them and want to create a more inclusive society but also by those who wish to take over these extractive institutions and become the beneficiaries from extraction. It was this latter group that triumphed in 1952 in Bolivia.

But when institutions persist, sometimes they do so in different forms. The new extractive coalition that emerged after 1952 in Bolivia could not do the extraction using the same instruments as before. The new elites of the MNR could not simply take over the haciendas of the old elite. But there are many ways to skin a cat. Just how the cat was skinned after 1952 and the implications of this for economic institutions were researched in the late 1960s by the political anthropologist Dwight Heath. The title of the essay he wrote, “New Patrons for Old: Changing Patron-Client Relationships in the Bolivian Yungas”, is revealing.

What Heath showed is that after the revolution the MNR set themselves up as the new elite. He studied in detail how they interacted with different elements in society, for example, the colonos and arrenderos, the poorest peasants who had previously worked on the large haciendas. Before 1952 these workers were embedded in patron-client relationships with the hacienda owners, the hacendados. To get access to land they had to provide political services for the hacendados, for example voting in the way they were told.

As the next figure from Heath’s paper shows, after 1952 these people became “ex-colonos” and “ex-arrenderos” and were no longer in patron-client relations with the ex-hacendados. Instead, however, they had to engage in similar relations with new patrons, the institutions that the MNR had set up to allocate land such as the sindicato (trade union) or agrarian judge, both controlled by the MNR.

So poor people had again to deliver political services and had to be subservient to authority — this time to the MNR — in exchange for access to land rather than have secure property rights to their own land. The political and economic insecurities they faced meant that they still had few incentives.

Though there were improvements after 1952, particularly an expansion of education, this did not reach the poor rural people and in consequence Bolivia stayed poor.

Monday
May212012

Our penal system

As we discussed in this blog post, the very high incarceration rates for African-Americans is a uniquely American failure.

There are fundamental problems with the US penal system in general, which locks up and puts under parole hundreds of thousands of young men (and women), mostly for non-violent offenses. But the comparison of the incarceration rates of whites and African-Americans, which is shown again in the next figure, is particularly jarring. Almost 5 out of every 100 male African-Americans are in jail, a rate more than five times that of white Americans.

Of course, this might all be because African-Americans commit more crime. But history suggests that there is more to it.

A recent book by Michelle Alexander, The New Jim Crow: Mass Incarceration in the Age of Colorblindness suggests that the treatment of African-Americans in our penal system is a continuation of Jim Crow politics of the South. She starts the book with the following story:

Jarvious Cotton cannot vote. Like his father, grandfather, great-grandfather and great-great-grandfather, he is being denied the right to participate in our electoral democracy. Cotton’s family tree tells the story of several generations of black men who were born in the United States but who were denied the most basic freedom that democracy promises — the freedom to vote for those who will make the rules and laws that govern one’s life. Cotton’s great-great-grandfather could not vote as a slave. His great-grandfather was beaten to death by the Ku Klux Klan for attempting to vote. His grandfather was prevented from voting by Klan intimidation. His father was barred from voting by poll taxes and literacy tests. Today Jarvious Cotton cannot vote because he, like many black men in the United States, has been labeled a felon and is currently on parole.

Alexander’s book is polemical and not heavy on the history or evidence. So if you are the skeptical type, you may not be convinced that there is something necessarily wrong with our prisons or that there is a systematic Jim Crow-like discrimination against African-Americans in our penal system.

But, David M. Oshinsky’s powerful (and disturbing) history of Mississippi prisons and convict leasing program during the Jim Crow era, Worse Than Slavery: Parchman Farm and the Ordeal of Jim Crow Justice should probably convince even the skeptics that there is something quite suspicious in the history of US penal system that appears, at least on the surface, to have shaped our present.

Oshinsky tells the story of Parchman Farm, the Mississippi state penitentiary, which came to symbolize almost all of the injustices and brutality of Jim Crow rule.

Emancipation of blacks in the aftermath of the Civil War did not bring equality in the US South. As we also discuss in Chapter 12 of Why Nations Fail, especially after Union troops were withdrawn from the South and Reconstruction ended, Southern elites were able to re-create institutions of essentially the same degree of extractiveness as the antebellum ones — albeit under a different guise. Gone was slavery, but in came the Black Code of Alabama and vagrancy laws ensuring that black workers could still be coerced and could not leave their employers. Blacks were emancipated, but Ku Klux Klan intimidation and literacy requirements meant to disenfranchise them made sure that they couldn’t vote after the end of Reconstruction. Blacks were equal on paper, but this was “separate but equal,” where their schools and hospitals were far from equal. And in every sphere of life, they were repressed and made subservient to whites — at least until the Civil Rights movement started to change it all.

In Mississippi, the antebellum system started being re-created even before Union troops left. An important element of this was the subjugation of blacks by mob violence and by the local sheriff and the justice system. Part of this was beatings and lynchings of blacks (some Northern Senators claimed that during this period, “two or three black men” were being lynched in Mississippi every day). But an equally sinister and perhaps even more consequential part was the prison system that developed starting in 1868.

The impetus came from a practical problem: now that blacks were no longer slaves and could not be directly disciplined and punished by their masters, how should they be kept under control? Locking them up — when mob violence and lynchings didn’t do the job — seemed like a natural idea, but this would cost the state a lot of money, especially at a time when resources were scarce and the prison system was both underdeveloped and severely gutted by the Civil War.

An innovative solution to this problem came from a businessman named Edmund Richardson who made a deal with state authorities in 1868 to lease convicts to use as cheap labor on his Yazoo Delta plantation. He promised to feed them and guard them. In return, the state paid him money, transported them to his plantation, and allowed him to use the convicts in whichever way he wanted — for all practical purposes totally unmonitored.

What started with Richardson grew into a huge industry. The demand for cheap labor to work in cotton plantations was high and so was the pent-up anger in Mississippi against blacks who were freed by Northerners. So convict leasing programs multiplied and local authorities obliged by locking up scores of young black men on totally minor or trumped-up charges to provide the labor necessary for the program.

This part of Oshinsky’s book makes truly harrowing reading: children locked up for “illegal gambling” or “being a tramp” or for the most minor instances of theft, or sometimes children locked up just because of the deep racial prejudices of the local authorities and the good people of Mississippi. In all cases, they headed to the plantations as convict labor either directly or via the local court system which imposed on them costs and fines that they could not pay (and thus they would be sent to the state penitentiary because of these unpaid debts). The system only became worse with the arrival of railway companies and other industries hungry for cheap labor.

Oshinsky describes, for example, the arrangement between the local sheriff and a turpentine operator in need of men in the words of a journalist (p. 71):

“Together they made up a list of some eighty negroes known to both as good husky fellows, capable of a fair day’s work.” The sheriff was promised five dollars plus expenses for each negro he “landed”. Within three weeks, he had arrested all eighty of them “on various petty charges — gambling, disorderly conduct, assault, and the like.”

From the get go, there was no room for confusion. The convict leasing program was designed for blacks, not for whites. Fittingly, the conditions for convict laborers were awful. Physical abuse, malnourishment and death from overwork were commonplace.

When convict leasing programs spread to other parts of the South, the outcomes were similar — even if few could match the brutality of the Mississippi system. In other parts of the South too, the convict leasing was associated with trumped-up charges against blacks, and inhumane work conditions. For example, the Greenville and Augusta Railroad Company started demanding convicts faster than South Carolina authorities could supply them, despite their efforts to lock up as many people as possible as potential convicts. Between 1877 and 1879, out of the 285 convicts working for the company, 128 died from gunshots, accidents and disease. And this huge death rate was not a surprise given their living conditions, described by the captain of the convict camp as (p. 60):

The English language does not possess words sufficiently strong to express the stench that rose from [this] place.

The situation was similar in other parts of the South. Many argued that 10 years was the “utmost length of a time that a convict can be expected to remain alive in a Georgia penitentiary”.

What the convict leasing program came to mean is well summarized by a list of quotations that Oshinsky provides at the beginning of the book:

The abuses of [our criminal justice] system have often been dwelt upon. It had the worst aspects of slavery without any of its redeeming features. The innocent, the guilty, and the depraved were herded together, children and adults, men and women, given into complete control of practically irresponsible men, whose sole object was to make the most money possible (Frank Sonborn, keynote address, in Ninth Atlanta Conference on Negro Crime, 1904).

And:

The convict’s condition [following the Civil War] was much worse than slavery. The life of a slave was valuable to his master, but there was no financial loss… if a convict died. (L. G. Shivers A History of the Mississippi Penitentiary, 1930).

In Mississippi, the system reached its end in one sense and its apogee in another with the opening of the Mississippi State penitentiary at Parchman Farm. Starting in 1894, there were restrictions on the leasing of convicts. Now instead, they would work as coerced laborers, under no better circumstances, at the cotton plantations of the state at Parchment Farm

Oshinsky describes this in the words of Hastings Hart:

I have visited Parchman repeatedly and I have found that their cotton was very profitable but that profit was secured by reducing the men to a condition of abject slavery.

And Parchman Farm is described in the 1919 Proceedings of the Annual Congress of the American Prison Association as:

The most profitable prison farming on record thus far in the State of Mississippi.

Brutality and exploitation at Parchman Farm continued well into the 1960s, and was only stopped by the Civil Rights movement. In 1970, a New York attorney, Roy Haber, started collecting information about abuses at Parchment Farm (which was not easy given the intimidation from the authorities against him and violence against inmates who cooperated with him). Finally he was able to compile a list of murders, rapes, beatings and tortures at Parchman Farm between 1969 and 71, which ran into 50 single spaced pages, and the snippets that Oshinsky recounts are truly disturbing (pp. 241-245).

Convict leasing and hard labor at Parchman plantation are gone. But with this history of a penal system designed to lock up and repress blacks, it is natural to wonder — or even hypothesize — that what we are seeing today is a nationwide continuation of both that system and its long-run consequences. After all, as journalist Ray Stannard Baker noted, the distinctive logic of the Jim Crow penal system required a particular type of justice (p. 63):

One thing impressed me especially… A [black man] brought in… was punished much more severely than a white man arrested for the same offense.

Against this background, Michelle Alexander’s claims about the origins of mass incarceration do not seem as incredulous, for example when she writes (p.225):

Mass incarceration as we know it would not exist today but for the racialization of crime in the media and political discourse. The War on Drugs was declared as part of a political ploy to capitalize on white racial resentment against African Americans…

Could this be the basis of the new Jim Crow? Could the incarceration of so many black men be a continuation under a different guise of the penal system that developed in the South after Reconstruction? Could this be, paraphrasing Robert Michels and our own use of his Iron Law of Oligarchy, “the Iron Law of Discrimination”?

Thursday
May172012

American Lessons (for Europe)

Thomas J. Sargent’s Nobel Prize lecture, “United States Then, Europe Now,” draws an important parallel between the United States - the Articles of Confederation of 1781 and the ratification of the U.S. Constitution in 1788 - and Europe today. In both cases, polities were joined in a currency union under the tutelage of a weak central government, without the power to tax and conduct fiscal policy, and with all the free-rider problems that this creates. Sargent takes the reader through a tour of some basic dynamic general (macro-) equilibrium modeling, emphasizing the importance of the government’s budget constraint — even the government’s debt has to be paid and that determines the value of its bonds.

But the bottom line comes down to how the U.S. Constitution sorted out the quagmire by giving the central government the power to tax and transferring the debt obligations of states to the central government (i.e., “bailing out” the states). This arrangement was not only more stable (because it avoided the free-rider problems) but also enabled the U.S. government to establish a reputation as a credit-worthy borrower, thus reducing its future borrowing costs. Sargent also notes the importance of the federal government not bailing out the states once more when, after 1829, many states started running large government deficits, which they were not able to sustain — Sargent suggests that this decision led to fiscal discipline at the state level.

Sargent draws the conclusion that the current situation in Europe is also likely untenable in the same way that the United States was in an unstable arrangement before 1788.

Though there is much to agree with Sargent’s conclusions, one thing in his discussion is notable in its absence: political economy.

Was the transition from the Articles of Confederation to the U.S. Constitution just a process of better (albeit slow) understanding and learning by clever and well intentioned leaders? Sargent implies that the answer is yes.

But one could have developed a political economy perspective where this transition was shaped by its economic and political implications for different groups.

In fact, one such perspective was developed in 1913 by Charles A. Beard in his imminently original and seminal An Economic Interpretation of the Constitution of the United States.

Beard started by dismissing explanations for the unique sequence of events leading to the U.S. Constitution based on some distinctive cultural characteristics of the American people. He also dismissed accounts that only emphasized the genius of the founding fathers. Instead, he wrote (p. 16):

class and group divisions based on property lie at the basis of modern government; and politics and constitutional law are inevitably a reflex of these contending interests.

So Beard argued that a defining set of factors leading to the U.S. Constitution were the political powerful groups who stood to benefit from it. Or in his words (p. 63):

Large and important groups of economic interests were adversely affected by the system of government under the Articles of Confederation, namely, those of public securities, shipping and manufacturing, money at interest; in short capital as opposed to land.

Importantly, Beard doesn’t deny that other factors were at play, or that the economic system that the U.S. Constitution created was more “efficient” — meaning that it created fewer instabilities. But the point is that this wasn’t the only or even perhaps the most important reason why the U.S. Constitution was adopted and ratified. It was ratified because those who stood to gain — the creditors, the manufacturers, the merchants and the politicians — were sufficiently powerful. (Some of the details of Beard’s account are hotly debated, see, for example, this paper, though the general political economy approach to constitutional design he advocated seems to have withstood the test of time).

The lessons for Europe are little more complex than a story like Sargent’s where institutional changes took place because they were finally understood to be more efficiency-enhancing. First, the coalitions in favor of a stronger fiscal union may be different today (for example, banks rather than capital owners in general may be the main beneficiaries of bailing out indebted countries). Second, the same economic interests may not be sufficiently politically powerful or may be facing a more determined opposition in Europe than in the United States 230 years ago. Third, the redistribution that a move towards a fiscal union will entail and the accompanying further bailouts of constituent polities may be more extensive and thus more difficult to pull off. Fourth, the institutional heterogeneity and the institutional weaknesses in some of the European countries such as Greece may be more dramatic today, making a fiscal union less attractive or less feasible.

One implication of all this is that what was a political equilibrium in the founding of the U.S. Constitution may not be a political equilibrium today in Europe, at least not in a form that includes all members of the European Union — even if such an arrangement would be efficiency-enhancing and growth-promoting.

This can be seen from the fact that what was a political equilibrium in the United States turned out not to be one in Latin America. After independence, Latin American countries also faced similar problems, including decisions on how to pay off the debts that had built up during their independence wars and how to build nations from smaller and sometimes competing polities. Some places like Argentina did manage to create a federal state, though Buenos Aires opted out for some time. Even in this case, as we point out in Chapter 13 of Why Nations Fail, they did it with a centralizing constitution that created many perverse incentives, shaping the future problems that Argentina would face. In other places, such as the putative Federal Republic of Central America, which lasted between 1823 and 1838, and Gran Colombia, which lasted only a decade between 1821 and 1831, no such agreement turned out to be stable.

So the sort of union that emerged in the U.S. Constitution and helped solve the free-rider problems and built government reputation in financial markets is not the only possible endpoint. Where Europe will end up will ultimately be determined not so much by what is the best arrangement for Europe as a whole but the political equilibrium between and within countries.