Recently, there's been a bit of debate over the blogosphere surrounding the Acemoglu and Robinson's new book, Why Nations Fail. After giving it a broadly positive review, Matt Yglesias described a "niggling concern":
So that's the story. To get rich you need to either land on a bunch of oil (Qatar) or else have the kind of inclusive institutions that allow for "creative destruction" and widespread opportunity. They don't deny that countries with extractive institutions (the Soviet Union in the 1950s, China in the 2000s) can grow rapidly, but this kind of extractive growth isn't sustainable.
I don't disagree with any of that, but I have some qualms with the idea that this properly defines the difference between the nations that are failing and the ones that aren't. As detailed in the book, Colombia doesn't have good institutions and this helps explain why its GDP per capita is $10,000 while Sweden's is $40,000. On the other hand, Colombia's $10,000 is way better than Syria's $5,000 or Yemen's $2,500 or Ethiopia's $1,000. Huge numbers of people live in countries like China, India, Indonesia, Pakistan, and Bangladesh that are poorer than Colombia. Is the question of "why nations fail" really best described as why Colombia isn't more like Denmark than why Pakistan isn't more like Colombia? People have done a lot of conceptual work with the distinction between catch-up growth (applying modern technology to nonmodernized societies) and frontier growth (pushing the boundaries of innovation forward) often in a rhetorical register that seems designed to downplay catch-up growth. But catch-up growth alone—in other words, a well-executed program of growth under extractive institutions—would massively ameliorate most of the world's most severe problems. It would also reduce the perceived labor market threat to working classes in rich countries and create much larger markets for sophisticated products and thus bolster innovation.
Acemoglu and Robinson responded.
It would indeed be a mistake to just focus on the differences between countries with the most inclusive institutions and those with the most extractive institutions. Almost all countries are in shades of gray, and that matters enormously for the prosperity of their citizens.
Moreover, they claim, extractive growth can "take countries quite far." This depends on two conditions: a measure of state centralization and a ruling elite comfortable enough for Schumpeterian creative destruction and institutional opening.
For me, however, this really exemplifies just how sterile the debate is. First of all, there's a real question of theoretical clarity when we speak of inclusivity. As I've written in the Ugandan context, who defines what is "inclusive"? To use their phrasing, at what point do we say "the state is indeed centralized enough, and the elite are sufficiently comfortable with glastnost"? How would that even be measured? More generally, how do we decide if an institution has genuinely given access to citizens writ large versus simply buying off or co-opting key constituencies or leaders? Even barring these difficulties, the question remains: over how long a period of time? Institutions are never settled, they are in a constant state of contestation and upheaval. Sometimes the result is gradual change (the United States' slow financialization in the last 5 decades); elsewhere it is immediate (Mobutu's Zairianization program).
Just to make myself clear: the charge may be made that I'm simply intellectually lazy and others are more able and willing to define such parameters. Perhaps, but my point is that this is an impossible undertaking. Economic institutions are constantly renegotiated. Even if we can decide on "inclusive," it cannot hold for any timeframe that allows for broad-based comparison. The very nature of institutions is that they are not simply constructs with which we people must 'deal.' They are living things, ever-changing, built on constant struggle over ideas, language, and often violent clashes. They are also actors in themselves: they are not just exclusionary, they actively exclude and are thus not to be taken as impartial structures because they have their own interests. Institutions are also arenas for conflict, the site of other battles. So deciding on a definition of "inclusive" will always be a fraught affair at best.
Second, for this reason, the best we can say is that some countries with more inclusive institutions sometimes grow faster than some countries with less inclusive institutions... sometimes. Of course there's no single route to economic development, and Acemoglu and Robinson are not claiming they've unlocked the single secret to riches. Yet, as I've tweeted and written about previously, this doesn't move us beyond what's been understood in the literature for over a decade. It does not get us any closer to theoretical, much less practical, understanding of sparking economic growth.
Third, there's an important pernicious effect on the debate: rather than moving us to think, harping on "inclusive institutions are good" stops cognition and ends the discussion. As Matt over at Aid Thoughts writes about a related A-R post (on Rosenstein-Rodan and the "Big Push"),
I understand that Acemoglu and Robinson consider institutions to be the chief determinant of everything since the beginning of time, but arguing that the Rosenstein-Rodan prediction is wrong because it ignored institutions is a little like arguing that a car missing all four wheels won’t drive because – damn it – it’s also missing four tires.
Chris Blattman touches on the same point:
If it’s war, quite obviously I fall on their side.
But I suppose I am not sure who we would fight against. I would have guessed most development economists agree that political stability and "good institutions" matter a great deal, and they quibble mainly over primacy, or perhaps which institutions...
Mostly, I think, theirs would be a war on neglect: the failure to study and understand institutions, rather than a rejection of their importance. That is probably the greatest gap in the field, one that the experiments revolution helps fill a little, but far from completely.
The fact that we still say things like "institutions matter" and don’t really have much hard proof for what specific institutions and why is a symptom of the problem.
I suppose the institutional perspective would instead ask why development economists aren’t pursuing the question with more vigor. I suspect it has something to do with a poor fit with the kind of empirical methods economists are allowed to employ and still maintain intellectual respectability.
That's certainly true. It's also a travesty.
Institutional economics has a rich tradition, and there's much to be learned from folks such as Peter Evans, John Toye, Jonathan di John, Erik Reinert, and Ha-Joon Chang, to name but a few prominent scholars that come immediately to mind. The problem is, as CBlatts notes, that in the world of academic economics (though admittedly less so in DevEon), in order to be "respectable" one almost needs to be doing large-N quantitative analyses and the like. Qualitative, historical, sociological, and other methods of inquiry are shunned. Economists don't address the "right" challenges because such problems don't gel with the right methodologies, inverting the normal relationship of question dictating answer. This is not an attack on economists themselves. Instead, it is a bundle of structural forces within the scholarly community - getting hired, published, and tenured - that has literally closed off one of the most interesting and important research avenues in the field.
This problem has been known for decades. There is no solution that I can offer that hasn't already received a full airing. For now, however, we can at least move away from harping on "inclusive institutions" as the determinant of development.