Why Nations Fail: The Origins of Power, Prosperity, and Poverty (66 page)

N
ATURALLY, THE PREDICTIVE POWER
of a theory where both small differences and contingency play key roles will be limited. Few would have predicted in the fifteenth or even the sixteenth centuries, let alone in the many centuries following the fall of the Roman Empire, that the major breakthrough toward inclusive institutions would happen in Britain. It was only the specific process of institutional drift and the nature of the critical juncture created by the opening of Atlantic trade that made this possible. Neither would many have believed in the midst of the Cultural Revolution during the 1970s that China
would soon be on a path toward radical changes in its economic institutions and subsequently on a breakneck growth trajectory. It is similarly impossible to predict with any certainty what the lay of the land will be in five hundred years. Yet these are not shortcomings of our theory. The historical account we have presented so far indicates that any approach based on historical determinism—based on geography, culture, or even other historical factors—is inadequate. Small differences and contingency are not just part of our theory; they are part of the shape of history.

Even if making precise predictions about which societies will prosper relative to others is difficult, we have seen throughout the book that our theory explains the broad differences in the prosperity and poverty of nations around the world fairly well. We will see in the rest of this chapter that it also provides some guidelines as to what types of societies are more likely to achieve economic growth over the next several decades.

First, vicious and virtuous circles generate a lot of persistence and sluggishness. There should be little doubt that in fifty or even a hundred years, the United States and Western Europe, based on their inclusive economic and political institutions, will be richer, most likely considerably richer, than sub-Saharan Africa, the Middle East, Central America, or Southeast Asia. However, within these broad patterns there will be major institutional changes in the next century, with some countries breaking the mold and transitioning from poor to rich.

Nations that have achieved almost no political centralization, such as Somalia and Afghanistan, or those that have undergone a collapse of the state, such as Haiti did over the last several decades—long before the massive earthquake there in 2010 led to the devastation of the country’s infrastructure—are unlikely either to achieve growth under extractive political institutions or to make major changes toward inclusive institutions. Instead, nations likely to grow over the next several decades—albeit probably under extractive institutions—are those that have attained some degree of political centralization. In sub-Saharan Africa this includes Burundi, Ethiopia, Rwanda, nations with long histories of centralized states, and Tanzania, which has
managed to build such centralization, or at least put in place some of the prerequisites for centralization, since independence. In Latin America, it includes Brazil, Chile, and Mexico, which have not only achieved political centralization but also made significant strides toward nascent pluralism. Our theory would suggest that sustained economic growth is very unlikely in Colombia.

Our theory also suggests that growth under extractive political institutions, as in China, will not bring sustained growth, and is likely to run out of steam. Beyond these cases, there is much uncertainty. Cuba, for example, might transition toward inclusive institutions and experience a major economic transformation, or it may linger on under extractive political and economic institutions. The same is true of North Korea and Burma (Myanmar) in Asia. Thus, while our theory provides the tools for thinking about how institutions change and the consequences of such changes, the nature of this change—the role of small differences and contingency—makes more precise predictions difficult.

Even greater caution is necessary in drawing policy recommendations from this broad account of the origins of prosperity and poverty. In the same way that the impact of critical junctures depends on existing institutions, how a society will respond to the same policy intervention depends on the institutions that are in place. Of course, our theory is all about how nations can take steps toward prosperity—by transforming their institutions from extractive to inclusive. But it also makes it very clear from the outset that there are no easy recipes for achieving such a transition. First, the vicious circle implies that changing institutions is much harder than it first appears. In particular, extractive institutions can re-create themselves under different guises, as we saw with the iron law of oligarchy in
chapter 12
. Thus the fact that the extractive regime of President Mubarak was overturned by popular protest in February 2011 does not guarantee that Egypt will move onto a path to more inclusive institutions. Instead extractive institutions may re-create themselves despite the vibrant and hopeful pro-democracy movement. Second, because the contingent path of history implies that it is difficult to know whether a particular interplay of
critical junctures and existing institutional differences will lead toward more inclusive or extractive institutions, it would be heroic to formulate general policy recommendations to encourage change toward inclusive institutions. Nevertheless, our theory is still useful for policy analysis, as it enables us to recognize bad policy advice, based on either incorrect hypotheses or inadequate understanding of how institutions can change. In this, as in most things, avoiding the worst mistakes is as important as—and more realistic than—attempting to develop simple solutions. Perhaps this is most clearly visible when we consider current policy recommendations encouraging “authoritarian growth” based on the successful Chinese growth experience of the last several decades. We next explain why these policy recommendations are misleading and why Chinese growth, as it has unfolded so far, is just another form of growth under extractive political institutions, unlikely to translate into sustained economic development.

Dai Guofang recognized the coming urban boom in China early on. New highways, business centers, residences, and skyscrapers were sprawling everywhere around China in the 1990s, and Dai thought this growth would only pick up speed in the next decade. He reasoned that his company, Jingsu Tieben Iron and Steel, could capture a large market as a low-cost producer, especially compared with the inefficient state-owned steel factories. Dai planned to build a true steel giant, and with support from the local party bosses in Changzhou, he started building in 2003. By March 2004, however, the project had been stopped by order of the Chinese Communist Party in Beijing, and Dai was arrested for reasons never clearly articulated. The authorities may have presumed that they would find some incriminating evidence in Dai’s accounts. In the event, he spent the next five years in jail and home detention, and was found guilty on a minor charge in 2009. His real crime was to start a large project that
would compete with state-sponsored companies and do so without the approval of the higher-ups in the Communist Party. This was certainly the lesson that others drew from the case.

The Communist Party’s reaction to entrepreneurs such as Dai should not be a surprise. Chen Yun, one of Deng Xiaoping’s closest associates and arguably the major architect behind the early market reforms, summarized the views of most party cadres with a “bird in a cage” analogy for the economy: China’s economy was the bird; the party’s control, the cage, had to be enlarged to make the bird healthier and more dynamic, but it could not be unlocked or removed, lest the bird fly away. Jiang Zemin, shortly after becoming general secretary of the Communist Party in 1989, the most powerful position in China, went even further and summarized the party’s suspicion of entrepreneurs by characterizing them as “self-employed traders and peddlers [who] cheat, embezzle, bribe and evade taxation.” Throughout the 1990s, even as foreign investment was pouring into China and state-owned enterprises were encouraged to expand, private entrepreneurship was greeted with suspicion, and many entrepreneurs were expropriated or even jailed. Jiang Zemin’s view of entrepreneurs, though in relative decline, is still widespread in China. In the words of a Chinese economist, “Big state companies can get involved in huge projects. But when private companies do so, especially in competition with the state, then trouble comes from every corners [
sic
].”

While scores of private companies are now profitably operating in China, many elements of the economy are still under the party’s command and protection. Journalist Richard McGregor reports that on the desk of the head of each of the biggest state companies in China stands a red phone. When it rings, it is the party calling with orders on what the company should do, where it should invest, and what its targets will be. These giant companies are still under the command of the party, a fact we are reminded of when the party decides to shuffle their chief executives, fire them, or promote them, with little explanation.

These stories of course do not deny that China has made great strides toward inclusive economic institutions, strides that underpin
its spectacular growth rates over the past thirty years. Most entrepreneurs have some security, not least because they cultivate the support of local cadres and Communist Party elites in Beijing. Most state-owned enterprises seek profits and compete in international markets. This is a radical change from the China of Mao. As we saw in the previous chapter, China was first able to grow because under Deng Xiaoping there were radical reforms away from the most extractive economic institutions and toward inclusive economic institutions. Growth has continued as Chinese economic institutions have been on a path toward greater inclusiveness, albeit at a slow pace. China is also greatly benefiting from its large supply of cheap labor and its access to foreign markets, capital, and technologies.

Even if Chinese economic institutions are incomparably more inclusive today than three decades ago, the Chinese experience is an example of growth under extractive political institutions. Despite the recent emphasis in China on innovation and technology, Chinese growth is based on the adoption of existing technologies and rapid investment, not creative destruction. An important aspect of this is that property rights are not entirely secure in China. Every now and then, just like Dai, some entrepreneurs are expropriated. Labor mobility is tightly regulated, and the most basic of property rights, the right to sell one’s own labor in the way one wishes, is still highly imperfect. The extent to which economic institutions are still far from being truly inclusive is illustrated by the fact that only a few businessmen and -women would even venture into any activity without the support of the local party cadre or, even more important, of Beijing. The connection between business and the party is highly lucrative for both. Businesses supported by the party receive contracts on favorable terms, can evict ordinary people to expropriate their land, and violate laws and regulations with impunity. Those who stand in the path of this business plan will be trampled and can even be jailed or murdered.

The all-too-present weight of the Communist Party and extractive institutions in China remind us of the many similarities between Soviet growth in the 1950s and ’60s and Chinese growth today, though there are also notable differences. The Soviet Union achieved growth under extractive economic institutions and extractive political institutions
because it forcibly allocated resources toward industry under a centralized command structure, particularly armaments and heavy industry. Such growth was feasible partly because there was a lot of catching up to be done. Growth under extractive institutions is easier when creative destruction is not a necessity. Chinese economic institutions are certainly more inclusive than those in the Soviet Union, but China’s political institutions are still extractive. The Communist Party is all-powerful in China and controls the entire state bureaucracy, the armed forces, the media, and large parts of the economy. Chinese people have few political freedoms and very little participation in the political process.

Many have long believed that growth in China would bring democracy and greater pluralism. There was a real sense in 1989 that the Tiananmen Square demonstrations would lead to greater opening and perhaps even the collapse of the communist regime. But tanks were unleashed on the demonstrators, and instead of a peaceful revolution, history books now call it the Tiananmen Square Massacre. In many ways, Chinese political institutions became more extractive in the aftermath of Tiananmen; reformers such as Zhao Ziyang, who as general secretary of the Communist Party lent his support to the students in Tiananmen Square, were purged, and the party clamped down on civil liberties and press freedom with greater zeal. Zhao Ziyang was put under house arrest for more than fifteen years, and his public record was gradually erased, so that he would not be even a symbol for those who supported political change.

Today the party’s control over the media, including the Internet, is unprecedented. Much of this is achieved through self-censorship: media outlets know that they should not mention Zhao Ziyang or Liu Xiaobo, the government critic demanding greater democratization, who is still languishing in prison even after he was awarded the Nobel Peace Prize. Self-censorship is supported by an Orwellian apparatus that can monitor conversations and communications, close Web sites and newspapers, and even selectively block access to individual news stories on the Internet. All of this was on display when news about corruption charges against the son of the general secretary of the party since 2002, Hu Jintao, broke out in 2009. The party’s
apparatus immediately sprang into action and was not only able to prevent Chinese media from covering the case but also managed to selectively block stories about the case on the
New York Times
and
Financial Times
Web sites.