Why Nations Fail: The Origins of Power, Prosperity, and Poverty (15 page)

Another example is the economic growth and industrialization of the Soviet Union from the first Five-Year Plan in 1928 until the 1970s. Political and economic institutions were highly extractive, and markets were heavily constrained. Nevertheless, the Soviet Union was able to achieve rapid economic growth because it could use the power of the state to move resources from agriculture, where they were very inefficiently used, into industry.

The second type of growth under extractive political institutions arises when the institutions permit the development of somewhat, even if not completely, inclusive economic institutions. Many societies with extractive political institutions will shy away from inclusive economic institutions because of fear of creative destruction. But the degree to which the elite manage to monopolize power varies across societies. In some, the position of the elite could be sufficiently secure that they may permit some moves toward inclusive economic institutions when they are fairly certain that this will not threaten their political power. Alternatively, the historical situation could be such as to endow an extractive political regime with rather inclusive economic institutions, which they decide not to block. These provide the second way in which growth can take place under extractive political institutions.

The rapid industrialization of South Korea under General Park is an example. Park came to power via a military coup in 1961, but he did so in a society heavily supported by the United States and with an economy where economic institutions were essentially inclusive. Though Park’s regime was authoritarian, it felt secure enough to promote economic growth, and in fact did so very actively—perhaps partly because the regime was not directly supported by extractive economic institutions. Differently from the Soviet Union and most other cases of growth under extractive institutions, South Korea transitioned from extractive political institutions toward inclusive political institutions in the 1980s. This successful transition was due to a confluence of factors.

By the 1970s, economic institutions in South Korea had become sufficiently inclusive that they reduced one of the strong rationales for extractive political institutions—the economic elite had little to gain from their own or the military’s dominance of politics. The relative equality of income in South Korea also meant that the elite had less to fear from pluralism and democracy. The key influence of the United States, particularly given the threat from North Korea, also meant that the strong democracy movement that challenged the military dictatorship could not be repressed for long. Though General Park’s assassination in 1979 was followed by another military coup, led by Chun Doo-hwan, Chun’s chosen successor, Roh Tae-woo, initiated a process of political reforms that led to the consolidation of a pluralistic democracy after 1992. Of course, no transition of this sort took place in the Soviet Union. In consequence, Soviet growth ran out of steam, and the economy began to collapse in the 1980s and then totally fell apart in the 1990s.

Chinese economic growth today also has several commonalities with both the Soviet and South Korean experiences. While the early stages of Chinese growth were spearheaded by radical market reforms in the agricultural sector, reforms in the industrial sector have been more muted. Even today, the state and the Communist Party play a central role in deciding which sectors and which companies will receive additional capital and will expand—in the process, making and breaking fortunes. As in the Soviet Union in its heyday, China
is growing rapidly, but this is still growth under extractive institutions, under the control of the state, with little sign of a transition to inclusive political institutions. The fact that Chinese economic institutions are still far from fully inclusive also suggests that a South Korean–style transition is less likely, though of course not impossible.

It is worth noting that political centralization is key to both ways in which growth under extractive political institutions can occur. Without some degree of political centralization, the planter elite in Barbados, Cuba, Haiti, and Jamaica would not have been able to keep law and order and defend their own assets and property. Without significant political centralization and a firm grip on political power, neither the South Korean military elites nor the Chinese Communist Party would have felt secure enough to manufacture significant economic reforms and still manage to cling to power. And without such centralization, the state in the Soviet Union or China could not have been able to coordinate economic activity to channel resources toward high productivity areas. A major dividing line between extractive political institutions is therefore their degree of political centralization. Those without it, such as many in sub-Saharan Africa, will find it difficult to achieve even limited growth.

Even though extractive institutions can generate some growth, they will usually not generate sustained economic growth, and certainly not the type of growth that is accompanied by creative destruction. When both political and economic institutions are extractive, the incentives will not be there for creative destruction and technological change. For a while the state may be able to create rapid economic growth by allocating resources and people by fiat, but this process is intrinsically limited. When the limits are hit, growth stops, as it did in the Soviet Union in the 1970s. Even when the Soviets achieved rapid economic growth, there was little technological change in most of the economy, though by pouring massive resources into the military they were able to develop military technologies and even pull ahead of the United States in the space and nuclear race for a short while. But this growth without creative destruction and without broad-based technological innovation was not sustainable and came to an abrupt end.

In addition, the arrangements that support economic growth under
extractive political institutions are, by their nature, fragile—they can collapse or can be easily destroyed by the infighting that the extractive institutions themselves generate. In fact, extractive political and economic institutions create a general tendency for infighting, because they lead to the concentration of wealth and power in the hands of a narrow elite. If another group can overwhelm and outmaneuver this elite and take control of the state, they will be the ones enjoying this wealth and power. Consequently, as our discussion of the collapse of the later Roman Empire and the Maya cities will illustrate (
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), fighting to control the all-powerful state is always latent, and it will periodically intensify and bring the undoing of these regimes, as it turns into civil war and sometimes into total breakdown and collapse of the state. One implication of this is that even if a society under extractive institutions initially achieves some degree of state centralization, it will not last. In fact, the infighting to take control of extractive institutions often leads to civil wars and widespread lawlessness, enshrining a persistent absence of state centralization as in many nations in sub-Saharan Africa and some in Latin America and South Asia.

Finally, when growth comes under extractive political institutions but where economic institutions have inclusive aspects, as they did in South Korea, there is always the danger that economic institutions become more extractive and growth stops. Those controlling political power will eventually find it more beneficial to use their power to limit competition, to increase their share of the pie, or even to steal and loot from others rather than support economic progress. The distribution and ability to exercise power will ultimately undermine the very foundations of economic prosperity, unless political institutions are transformed from extractive to inclusive.

I
N 1346 THE BUBONIC
plague, the Black Death, reached the port city of Tana at the mouth of the River Don on the Black Sea. Transmitted by fleas living on rats, the plague was brought from China by traders traveling along the Silk Road, the great trans-Asian commercial artery. Thanks to Genoese traders, the rats were soon spreading the fleas and the plague from Tana to the entire Mediterranean. By early 1347, the plague had reached Constantinople. In the spring of 1348, it was spreading through France and North Africa and up the boot of Italy. The plague wiped out about half of the population of any area it hit. Its arrival in the Italian city of Florence was witnessed firsthand by the Italian writer Giovanni Boccaccio. He later recalled:

People in England knew the plague was coming their way and were well aware of impending doom. In mid-August 1348, King Edward III asked the Archbishop of Canterbury to organize prayers, and many bishops wrote letters for priests to read out in church to help people cope with what was about to hit them. Ralph of Shrewsbury, Bishop of Bath, wrote to his priests:

It didn’t do any good. The plague hit and quickly wiped out about half the English population. Such catastrophes can have a huge effect on the institutions of society. Perhaps understandably, scores of people went mad. Boccaccio noted that “some maintained that an infallible way of warding off this appalling evil was to drink heavily, enjoy life to the full, go round singing and merrymaking, gratify all one’s cravings whenever the opportunity offered, and shrug the thing off as an enormous joke … and this explains why those women who recovered were possibly less chaste in the period that followed.” Yet the
plague also had a socially, economically, and politically transformative impact on medieval European societies.

At the turn of the fourteenth century, Europe had a feudal order, an organization of society that first emerged in Western Europe after the collapse of the Roman Empire. It was based on a hierarchical relationship between the king and the lords beneath him, with the peasants at the bottom. The king owned the land and he granted it to the lords in exchange for military services. The lords then allocated land to peasants, in exchange for which peasants had to perform extensive unpaid labor and were subject to many fines and taxes. Peasants, who because of their “servile” status were thus called serfs, were tied to the land, unable to move elsewhere without the permission of their lord, who was not just the landlord, but also the judge, jury, and police force. It was a highly extractive system, with wealth flowing upward from the many peasants to the few lords.

The massive scarcity of labor created by the plague shook the foundations of the feudal order. It encouraged peasants to demand that things change. At Eynsham Abbey, for example, the peasants demanded that many of the fines and unpaid labor be reduced. They got what they wanted, and their new contract began with the assertion “At the time of the mortality or pestilence, which occurred in 1349, scarcely two tenants remained in the manor, and they expressed their intention of leaving unless Brother Nicholas of Upton, then abbot and lord of the manor, made a new agreement with them.” He did.

What happened at Eynsham happened everywhere. Peasants started to free themselves from compulsory labor services and many obligations to their lords. Wages started to rise. The government tried to put a stop to this and, in 1351, passed the Statute of Laborers, which commenced:

The statute in effect tried to fix wages at the levels paid before the Black Death. Particularly concerning for the English elite was “enticement,” the attempt by one lord to attract the scarce peasants of another. The solution was to make prison the punishment for leaving employment without permission of the employer: