Acemoglu & Robinson- Why Nations Fail - Chapter 2- Theories that don’t work PDF

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Acemoglu & Robinson- Why Nations Fail - Chapter 2- Theories that don’t work...

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Acemoglu & Robinson: Why Nations Fail - Chapter 2: Theories that don’t work

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England experienced economic growth first. Growth emerged in the second half of the 18th century. Industrialisation in England followed by industrialisation in most of Western Europe and US. English prosperity spread to Britain’s colonies - Canada, Australia and New Zealand. Countries in the top and bottom would be very similar over the years. In 2008, most of Africa, Afghanistan, Haiti and parts of Southeast Asia are the poorest in the world with average per-capita incomes less than $2000 annually. Whereas, North America, Western Europe, Australasia and Japan are the richest with annual income per-capita of $20,000. or more. With America the richest are US and Canada. Then Chile, Argentina, Brazil, Mexico and Uruguay. Then Colombia, Dominican Republic, Ecuador and Peru. At the bottom there is Bolivia, Guatemala and Paraguay. This ranking has been identical for many years. There are patterns of prosperity and these patterns are not unchanging. Most world inequality happened since late 18th century, following Industrial Revolution. However, rankings are stable since middle of 18th century but were completely different 500 years ago. Most hypotheses social scientists have proposed for the origins of poverty and prosperity don’t work

The geography hypothesis - The geography hypothesis is a theory that is widely accepted in causing world inequality. - Montesquieu noted the geographic concentration of prosperity and poverty. He argued people in tropic climates tended to be lazy and lacked inquisitiveness. As a consequence, they didn’t work hard and were not innovative and therefore they were poor. Also lazy people tended to be ruled by despots and this explains some of the political phenomena associated with economic failure such as dictatorship. - However, economic advancements of Singapore, Malaysia and Botswana contradict the theory. - Jeffrey Sachs also advocates the modern view that tropical diseases have bad consequences for health and labour productivity. Also, tropical soils do not allow for productive agriculture. - However, the geography hypothesis cannot explain world inequality. The hypothesis cannot explain differences between North and South Korea and other countries with 2 parts. History shows that there is no connection between climate or geography and economic success. - Tropics have not always been poorer than temperate latitudes - Aztec and Inca civilisations prove this (the Tropics in America were richer than temperate zones). - The reversal in economic growth of the rich countries had nothing to do with geography but were about how they were colonised. Reversal happened in Americas, Indian subcontinent, China, South Korea, Singapore, Japan, South Africa. - Tropical diseases are not the reason why Africa is poor. - The other part of the geography hypothesis is that the tropics are poor because tropical agriculture is unproductive. This is some what true. BUT the prime determinant of low agricultural productivity in many poor countries is due to the consequence of the ownership structure of the land and the incentives that are created for farmers by governments and institutions. - World inequality is not caused by differences in agricultural productivity but caused by the uneven dissemination of industrial technologies and manufacturing production. - Jared Diamond has another geography hypothesis that the origins of inequality in the modern period (500 years ago) came from different historical funding of plant and animal species which then influenced agricultural productivity. In some places, such as the Fertile Crescent in the modern Middle East, there were a large number of species that could be domesticated by humans. Elsewhere, such as the Americas, there were not. Having many species capable of being domesticated made it very attractive for societies to make the transition from a huntergather to a farming lifestyle. As a consequence, farming developed earlier in the Fertile Crescent than in the Americas. In places where farming dominated, technological innovation took place much more rapidly than in other parts of the world. Diamond therefore believes the different

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availability of animal and plant species created different levels of farming, which led to different paths of technological change and prosperity across different continents. However, his thesis cannot explain modern world inequality. For example, he argues the Spanish were prosperous as they had a longer history of farming and better technology. But this was also the case for those in Aztecs and Incas but they are now poor. Diamond’s thesis does not explain world inequality and does not explain the uneven dissemination in technology. His argument is about continental inequality and is not well equipped to explain variation within continents which is an essential part of modern world inequality. Doesn’t explain why the Industrial Revolution happened in England and not in the countries it didn’t happen in. Patterns within Americas are highly unlikely to have been driven by geographical factors. The institutions imposed by European colonists created a ‘reversal of fortune’. Also unlikely to explain poverty of the Middle East. The Middle East led the world in the Neolithic Revolution but it was not the geography of the Middle East that made the Neolithic Revolution flourish in that part of the world and it also did not make it poor. However, it was the expansion and consolidation of the Ottoman Empire, and it is the institutional legacy of this empire that keep the Middle East poor today.

The Culture Hypothesis - The second widely accepted theory, the culture hypothesis, relates prosperity to culture. - Goes back to Weber, who argued that the Protestant Reformation and the Protestant ethic played a role in the rise of modern industrial society in Western Europe. - The culture hypothesis can be useful for understanding world inequality since social norms matter and can be hard to change, and they also sometimes support institutional differences. But mostly the culture hypothesis is not useful since those aspects of culture - religion, national ethics, African or Latin values - are not important for understanding how we got here and why inequalities continue. - Culture is very different between South and North Korea but it did not cause the differences in economic prosperity. - In Congo, they tried to adopt initiatives of the Portuguese but they failed. Therefore African values or culture did not prevent the adoption of new technologies and practices. Further contact with the Europeans led to Congo adopting other Western practices such as literacy, dress styles and house designs. Also other African societies changed their production patterns. In West Africa there was rapid economic development with exports of palm oil and ground nuts. But this was all obliterated not by African culture but first by European colonialism and then post independence by African governments. Congo did not adopt superior tech as there was no incentive to as output would be taxed or they would be exported as slaves due to profit levels. - With Weber’s argument, there is little relationship between religion and economic success. France quickly copied Britain and Netherlands. Moreover, none of the economic successes in East Asia have nothing to do with Christian religion. - Historical events rather than cultural factors (Islam, religion) shaped economic prosperity and poverty in the Middle East - Ottoman Empire, French and English colonial empires, development path after being independent was forged by the history of Ottoman and European rule. Egypt broke away temporarily from ottoman Empire and did grow but stopped after it fell under European growth after Muhammad Ali’s death. - Book argues that maybe the cultural factors that matter were tied to national cultures. However, not the case since English culture was in Canada and US and also in Sierra Leone and Nigeria but there had very different levels of prosperity. The English legacy is not the reason for the success of North America. - Another version of the culture hypothesis is European vs non-European. However, it is incorrect since a greater proportion of the population of Argentina and Uruguay, compared with the population of Canada and the US, is of European descent, but Argentina’s and Uruguay’s economic performance is worse. Also Japan and Singapore don’t have as much of a population that is of European descent than Western Europe but they are still more prosperous. - China is rapidly growing. Chinese poverty until Mao’s death had nothing to do with Chinese culture but due to the way Mao organised the economy and conducted politics - Great Leap

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Forward (caused starvation and famine), Cultural Revolution (caused mass persecution of intellectuals and the educated). Overall, the culture hypothesis is also unhelpful for explaining other aspects of the lay of the land around us today. There are differences in beliefs, culture and values between places but these are due to the differences in the two places different institutions and institutional histories. Also cultural attitudes are unlikely to account by themselves for the growth miracles in East Asia and China.

The Ignorance Hypothesis - Says world inequality exists because we or our rulers do not know how to make poor countries rich. This view comes from most economists. They believe that the science of economics should focus on the best use of scarce means to satisfy social ends. - The First Welfare Theorem identifies the circumstances under which the allocation of resources in a market economy is socially desirable from an economic point of view. A market economy is where individuals and firms can freely produce, buy and sell products or services. If this does not happen there is market failure and these failures provide the basis for a theory of world inequality, since the more the market goes unaddressed, the poorer a country is likely to be. - The ignorance hypothesis says that poor countries are poor because they have a lot of market failures and because economists and policymakers do not know how to get rid of market failures. - However, ignorance could only explain a small part of world inequality and not explain all. - For example, the sustained economic decline that soon set in Ghana after independence from Britain was caused by ignorance. Nkrumah’s policies focused on developing state industry, which was very inefficient. - However, Ghana or other countries apparent economic mismanagement cannot simply be blamed on ignorance. - The divergent paths of the US and Mexico were not because of the disparity in the ignorance of leaders of the 2 nations but it was the differences in the institutional constraints the countries presidents and elites were facing. - The ignorance hypothesis is different to the geography and cultural ones since it comes with a suggestion about how to solve the problem of poverty. - However, this hypothesis does not work, it does not explain the origins of prosperity around the world or why there is inequality. - When nations break out of institutional patterns that cause poverty and then change path to economic growth, this is not because their ignorant leaders have become better informed or less self interested. For example in China, Deng did not switch from the Chinese Communist Party’s economic policies that caused poverty and starvation because he become better informed but because he had different interests and political objectives and their reforms caused market incentives in agriculture and industry. It was therefore politics that determined the switch from communism and toward market incentives in China, not better advice or learning how econ worked. Conclusion - To understand world inequality we have to understand why some societies are organised in very inefficient and socially undesirable ways. - Poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose. - Achieving prosperity depends on solving some basic political problems....