Tag Archives: why nations fail

Does democracy cause growth?

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William Easterly’s new book, The Tyranny of Experts, argues that positive changes in freedoms are the causes of stable long run growth. But as he admitted to me recently on an Al-Jazeera talk show, the book does not present any rigorous evidence to back the claim, partly because thus far research findings have been mixed on the question of how democracy/autocracy impacts economic growth.

Well, Easterly’s book tour just got a boost thanks to Acemoglu et al. who have a new paper (see their blog post on it here) showing that democracy does indeed cause growth (boosting long run per capita income by as much as 20%):

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Reweighted relationship between GDP per capita and democracy (Source: Acemoglu et al., 2014)

Here is the paper’s abstract:

We provide evidence that democracy has a significant and robust positive effect on GDP. Our empirical strategy relies on a dichotomous measure of democracy coded from several sources to reduce measurement error and controls for country fixed effects and the rich dynamics of GDP, which otherwise confound the effect of democracy on economic growth. Our baseline results use a linear model for GDP dynamics estimated using either a standard within estimator or various different Generalized Method of Moments estimators, and show that democratizations increase GDP per capita by about 20% in the long run. These results are confirmed when we use a semi-parametric propensity score matching estimator to control for GDP dynamics. We also obtain similar results using regional waves of democratizations and reversals to instrument for country democracy. Our results suggest that democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest. We find little support for the view that democracy is a constraint on economic growth for less developed economies [emphasis mine].

The full paper is available here.

Daron Acemoglu and James Robinson wrote the classic Economic Origins of Dictatorship and Democracy. The book is thin on empirics and analytical narratives, but is an amazing formal take on the subject of democratization. To balance Economic Origins you should probably also read Barrington Moore’s magnum opus Social Origins of Dictatorship and Democracy.

Daron Acemoglu talks State Building

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Last month MIT Economist Daron Acemoglu (co-author of Why Nations Fail) gave the Nemmers lecture at the Northwestern Econ Department (see video here).

In the lecture he defines inclusive institutions as having two components: (i) pluralism and (ii) political centralization.

Now, when most people talk about institutional development they like to focus on the first component. This is the crowd that will tell you that what Rwanda needed after 1994 was electoral democracy and free market institutions and all would be well (Did you know that Mali has elections this July?) But history teaches us that that is not the whole story. There is also the problem of Stateness (aka political centralization), and how it comes about.

Finally Acemoglu and Robinson are addressing what I think is a weakness in their inclusive-institutions-as-the-fundamental-cause-of-long-run-growth argument – the question of the need for political centralization through state building (and the messiness it entails). In the lecture, Acemoglu makes the argument that pluralism can actually lead to state building (or makes it easier) through the creation of “consensually strong states”; and that the process of state building can lead to pluralism due to the centralizing leader’s need to cut deals with local elites. In other words, there is reverse causation between pluralism and stateness.

The takeaway is that inclusive institutions result from the joint development of sustained economic growth and a wider distribution of political power.

This is all good, although I wish Acemoglu and Robinson explored the role of coercion in state-building. My reading of history may be completely out of whack, but when I look back in time I see a lot of conquests and forcible inclusion into states and a lot less “deal making.” Conquests not contrasts appear to be the modal MO of state formation.

Where do the poor live, and how do we make them become middle class?

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The Economist reports:

“WHERE do the world’s poor live? The obvious answer: in poor countries. But in a recent series of articles Andy Sumner of Britain’s Institute of Development Studies showed that the obvious answer is wrong. Four-fifths of those surviving on less than $2 a day, he found, live in middle-income countries with a gross national income per head of between $1,000 and $12,500, not poor ones. His finding reflects the fact that a long but inequitable period of economic growth has lifted many developing countries into middle-income status but left a minority of their populations mired in poverty. Since the countries involved include giants like China and India, even a minority amounts to a very large number of people. That matters because middle-income countries can afford to help their own poor.”

The article raises important issues that inform the debate on how to tackle problems of poverty and underdevelopment – is it all about politics & governance or all about economic expansion? The answer, of course is that it is a moderate mix of both.

But since political realities often force governments to concentrate on one or the other, a responsible answer is that it is all context-dependent; some places need strong economic expansion first, before political reforms can be anchored in society. In others, political change should be top of the checklist.

The Botswanas and Singapores of this world are lucky in that their leaders were smart enough to know what their countries needed and pursued it with singular ambition, despite the unavoidable mess that came with the choices they made.

This of course goes against the received wisdom among academics (me included) who believe in the strong power of the right types of (liberal, in the classical sense) institutions to put countries on the path to becoming Denmark. The problem with this approach is that it does not tell us how to compress the more than 600 years that transpired between the Magna Carta and the voting reform legislations in England in the latter part of the 19th century. Lest we forget, England (which is every scholar’s favorite source of empirical conceptualization of institutional development) has not always had good institutions.

Institutions take a lot of time to build. A lot more time than the average human life span.

So the question still stands: How do we get the most number of people out of poverty in the least amount of time with the least harm to their political and human rights?

More on this here.

More on Obama’s WB President Nomination

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Source: Wikipedia

Nigerian Ngozi Okonjo-Iweala is definitely the dream candidate for the Bank. But the realities of U.S. domestic politics and foreign policy concerns are stacked against her nomination to the presidency of the Bank. It will be hard for the U.S. to selflessly relinquish an important tool of foreign policy and influence in the Bank’s presidency.

If Obama backs down, he will be criticized for being soft in the face of international pressure. If he nominates a non-American, he will still be criticized as an apologist for those who hate America (real or imagined) and a believer in American decline.

Obama’s incentive is to get his nominee become World Bank President. Full stop.

Source: Wikipedia

So far those rooting for Ngozi (including yours truly) have questioned Jim Yong Kim’s credibility (he is/was not a fan of neo-liberalism) and competence (he is not an Economics PhD; but a mere MD, PhD) as World Bank president.

You can get Kim’s co-authored book here (or your local library; $97 is a bit pricey), it is on my to-read list (A review of the book is available here).

Here is quoting a post over at the Duck of Minerva for a more balanced take:

If Dr. Kim criticized the growth agenda of the structural adjustment era, so what? This has all become mainstreamed into the Bank’s own philosophy of pro-poor growth.Does it take a PhD in Economics to run the World Bank successfully? If selected, Dr. Kim would be the leader with the most hands-on development experience that the Bank has ever possessed. He would be as or more experienced in the field as serious contenders that were mooted in advance like Susan Rice, Hillary Clinton, or Pepsico CEO Indra Nooyi (ok, maybe Larry Summers knows more but Summers always know more than anybody). As Daron Acemoglu and Jim Robinson pointed out on their blog [Why Nations Fail]: “Perhaps all of Mr. Kim’s critics prefer the status quo where the World Bank is run by ex-warmongers (Robert McNamara), bankers (James Wolfensohn) or career civil servants (Robert Zoelick). Wait wasn’t that the World Bank that they loved to criticize?”

Adding that:

You don’t have to denigrate Dr. Kim to praise the other candidates. The strongest case is that while Dr. Kim is a good candidate, Dr. Okonjo-Iweala is the dream candidate. She’s from a large developing country, knows the issue well, understands the complex world of global finance, and is intimately familiar with the culture and organization of the Bank. And, for her supporters, the changing nature of the international system has made this practice of the U.S. having the automatic right to appoint the Bank’s president an anachronism.