Introduction to Institutional Development: A Framework for Examining Political and Economic Inclusiveness

Acemoglu and Robinson's "Why Nations Fail" explores various development histories and strategies through out the world. Through close examination of institutional systems as diverse as the east African Kingdom of Kongo, Victorian and Industrial Revolution Britain, to ancient and modern China, "Why Nations Fail" provides a powerful framework to examine how institutions systematically induce or impede development. The central thesis of "Why Nations Fail" is that there are two types of political and economic institutions, extractive and inclusive. We will now explore the some of the specific examples of extractive and inclusive political and economic institutions and how this examination applies to the development of the Chinese Economy.

The type of political and economic institutions set up and perpetuated by the elites within a given society has stark and far-reaching effects on its developmental trajectory. According to the examples given, extractive institutions lead to high levels of wealth, power, and income for the elite few and depressed growth for the larger economy and subjugation for the larger swaths of society. Inclusive institutions pave the way for healthy growth in the economy across the board as well as more of a shared sense of power and responsibility in governance.

“Why Nations Fail” cites the example of the Kingdom of Kongo and its successor The Democratic Republic of the Congo as an example of extractive political and economic institutions. High taxes and other forms of coercive expropriation of farm production made adopting plows and other modern agricultural practices impractical for the Congolese people. The King also found it much more profitable to focus on the acquisition of western guns to respond to the demand for African slaves through the slave trade. The elites who governed away from the capital profited more from collecting arbitrary taxes and operating slave plantations than encouraging people to save and invest. The extractive political and economic institutions work together in a self reinforcing "vicious circle" by which elites utilize the institutions to preserve and/or increase their wealth and power at the expense of developing the larger economy as well as the masses' political power. This can be seen in the fabulous wealth and absolute power of the Congolese elite and the abject poverty and consignment to the status of property of the slaves.

While these are extreme examples of extractive political and economic institutions, the outcomes of lack of saving, investment, innovation, and creative destruction are the same from other iterations of extractive institutions. Another form of this is the forbidding of printing presses in the Ottoman Empire until the mid 1800s for fear of the subversive ideas that may spread resulting in the loss of power to the political elite. Such active discouragement of innovation had terrible, long-term effects on the literacy of the population and by extension the economic progress of the Ottoman Empire.

The inclusive economic institutions are those that “allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish.” Inclusive political institutions must be “sufficiently central and pluralistic”. These two types of institutions have their own tendency to be self-reinforcing through a process Acemoglu and Robinson call the "virtuous circle".

An example of the virtuous circle in practice is Britain in the 1700s in between the Glorious and Industrial Revolutions. In deposing the Divine Right of Kings, the British elites opened the door for the political freedoms they enjoyed to be extended to the great masses of the British people. As such these masses wanted and in fact needed more inclusive economic institutions. When these people took drastic measures to make this a reality, the political inclusive institution of the rule of law protected them from the instinctive reaction of the elites to impose tyranny in order to protect their own exclusive rights. According to Acemoglu and Robinson, it was the consideration of the similarities between the elites rights under the absolute rule of the king and the great masses tenuous position. The virtuous circle enabled the continued expansion of the rights of political participation and economic progress, which led to technological change, more economic progress, calls for widening political participation, and so on.

Acemoglu and Robinson’s observations provide a useful framework to examine the political and economic institutions of Hong Kong and China. China’s One Party System is highly central, but not sufficiently pluralistic. The lack of independent judiciary as well as official feedback channels for the great masses to utilize in the critique of policy mean that political power is highly concentrated within the Party Elite. With similarities to the Ottoman printing press ban, China’s policing of its netizens limits access to and spreading of new ideas for fear of the loss of power these ideas may result in. Therefore, Acemoglu and Robinson would classify China’s political institutions as extractive.

However, China’s economic institutions make for a much more puzzling case. The Chinese economic institutions certainly encourage people to engage in a wide variety of economic activities that are highly up to their own choices. There exists a vibrant culture around small-scale entrepreneurship and more recent massive investments in large consumer shopping centers. Though access to education can be improved upon in rural areas, China still boasts a postsecondary school population of nearly 3 times the United States. With huge investments from Chinese corporations, foreign multinational corporations, and the Chinese Government are increasing the amount of research dollars devoted to innovation. All of these would make a solid case for China having inclusive economic institutions.

On the other hand, there is evidence that property rights are not entirely secure as shown by the evictions that occur to complete large, state projects like the Olympic Village, Three Gorges Dam, and High Speed Rail. In fact, all of the land in China is officially owned by the government, which distributes large and lucrative leasing agreements to few real estate developers for capital use, some of which are owned by the Chinese Government. That combined with a large system of State Owned Enterprises (SOEs) with exclusive rights to several major industries gives China quite a large system of monopolies. Being that all of these vast corporations are owned by the Chinese Communist Party means that the Chinese economy has quite a few elements of cartelism or, at the very least, a restrictive oligopoly. On top of that, government’s restrictions of capital flows makes for a very undeveloped system of capital and cash markets within China.

The combination of extractive political institutions with elements of inclusive economic institutions make China’s current institutional economic and political state remarkably similar to that of South Korea under Rhee Syngman and General Park Chung-Hee. South Korea provides a very apt and interesting comparison to China’s institutional development. We will be doing a further examination of South Korea next week.