Birth of Institutions, Ethnic Fractionalization, and Scared Politicians

Above picture taken by the author on campus at the Chinese University of Hong Kong


Post 2 – Birth of Institutions, Ethnic Fractionalization, and Scared Politicians

Many of the worst ills of American society, increasingly to be found in varying degrees in other developed countries, can be traced not to the democratic legacy but to the demands of modern materialism. Gross individualism and cut-throat morality arise when political and intellectual freedoms are curbed on the one hand while on the other fierce economic competitiveness is encouraged by making material success the measure of prestige and progress. The result is a society where cultural and human values are set aside and money value reigns supreme. -Aung San Suu Kyi


Institutions, like college essays or children, are much easier to start on a healthy path and subsequently enjoy the benefits of their growth—and much more difficult to reform later in the process. For this reason, the origins of institutions are fundamentally important. In last weeks post, I discussed some of the incentives surrounding the founding of Hong Kong's institutions, such as non-invasive trade regulations to support (in part) the opium trade, the stability of colonial government to attract overseas business, and peaceful coexistence with the immigrant Chinese population, as there was little to extract from them.

Reaching a bit further than this, the existing, pre-colonial situation on the island of Hong Kong was already much more conducive to healthy colonial institutions than many of the other colonies in East Asia. According to Acemoglu and Robinson's framework, this was primarily due to the basically negligible (around 7,500) native population on the island when the British claimed it in the Treaty of Nanking in 1842.1 It was a small fishing village, which neither threatened the colonialists militarily, nor incentivized extractive institutions to take advantage of their paltry resources and capital. The value of Hong Kong was primarily as an entrepot and as a naval coaling station in Asia.2 Because of the sparse population on the island, the colonial rule was much closer to that of the United States or Australia, where indigenous populations were also sparse, rather than colonialized South America or India.

Over the course of the next 20 years, the population and economy of the colony grew rapidly to over 85,000 people, most of whom were immigrants from across the bay in Guangdong. This mass immigration, however, did not substantively change the colonial institutions. It could even be compared to the Irish immigration into the United States, where a large group came looking for greater opportunities, and provided a cheap source of labor by which to foment growth. The immigrants were also invested in making their new home successful and lucrative.

Furthermore, the colonial government, while being completely exclusive to white Brits, was also not the strongest force in colony compared to the vast shipping companies which dominated the island. These companies relied on the Chinese to run their ships and communicate trade deals with the mainland, and these cooperations were therefore incentivized to deal fairly and liberally (it should be noted that originally these were Cantonese migrants, though after the takeover of the PRC in the 1940s, many Shanghaiese entrepreneurs and businessmen poured into Hong Kong and assumed important roles in business).

As Professor Weil discusses in Economic Growth, ethnic fractionalization (a measure of the ethnic diversity within a country's population) is often inversely related to growth, especially in colonized regions. This is partly due to colonial institutions that either were ignorant of ethnic and tribal differences or purposefully pitted native populations against one another. Hong Kong has an extremely low Ethnic Frationalization according to Alesina et al. (2003),3 however, I would guess that even if it had a similar diversity to the United States or Australia, the institutional foundations as a country of immigrants would still have supported rapid growth, because, although its not an inclusive democracy, it has a pluralistic, inclusive economy. 4 The same could be said about Singapore, which is rated as having much higher diversity at .385 (compared to .062 for HK), and enjoys considerable economic success and high employment while having an even more authoritarian government.5

Acemoglu discusses this aspect of economic institutions trumping politics in his discussion of the Meiji Restoration in Japan. In spite of the emperor, Japan's real power was in the hands of the Shogunate. During the Meiji Restoration, another force began to exact a large influence on the Shogunate and policy in general: the Zaibatsu, at the time four families that held various monopolies within Japan. The Zaibatsu, in many ways, were responsible for setting up liberal economic institutions in Japan during the Meiji Restoration, thus catapulting Japans industrialization. Similarly, Hong Kong was, and still is, controlled by only a handful of family-run monopolies. They influenced institutional development in the colony more profoundly than the purposefully weak colonial government did.

Connecting these ideas to mainland China is a little more difficult. Colonialism in China was primarily exploitive, initially to trade for tea and silk, as well as to sell European goods to the large Chinese market. However, China was more isolated from the rest of the world through its closed-door economic policies. The colonial powers served to destabilize the Chinese government, clearly hastening the emperors demise and later leading to conflicting interests with Communist support of the Communist rise, while the United States backed the Nationalist government. What is more significant was the internal situation in China during the final Dynasty, the Qing. To make a long story short, the Chinese empire was too large and too diverse (Chinese often cite to me, with great pride, that China has exactly 55 ethnic minorities) to have an economic system which was more powerful than the government (the emperor's institutional setup was also primed to keep it that way). Especially from the start of the 19th century, the empire was wracked by revolutions and meddling Western powers, and was therefore unable to centralize power or maintain a modicum of stability to support business. Though as Acemoglu and Robinson discuss, the emperor was much harder to unseat in China than it was in Japan, so the country remained in a precarious situation most of the past two centuries. Ironically, it was only made culturally uniform by the destructive Communist Reforms of the 1950s and 60s, which caused massive suffering.

This was supported by a line in Why Nation's Fail, where the authors state that, because Mao had eliminated most of the opposition during the Cultural Revolution, Deng and the members of the CCP were subsequently able to institute the liberal economic reforms necessary to bring the country out of its impoverished state. Though there is validity to this statement, it strikes me as a dangerous precedent to set for other authoritarian regimes in the world.

To bring this discussion into the present, it seems that the current impending question is whether the authoritarian growth model can be an effective prescription for the absolutist governments of the world. A&R would give a strong “no,” and point to the necessity for governments to pluralize (which primarily means become more democratic) once they have achieved some growth due to political centralization. Authoritarian regimes can only achieve so much growth, they argue, before hitting a ceiling. They repute the argument of modernization theory, which states that a growing economy will naturally lead to a more democratic system. To A&R institutions and the economy are intrinsically, symbiotically entwined–progress in one will lead to development in the other (however it does seem that for them, instituions are likely to be the progenitor of either a "virtuous" or "vicious cycle"). To achieve a successful alignment of institutions for growth, it seems from their argument, that a certain amount of luck is involved, such as with the case of Lula in Brazil. There is no step-by-step directions for effective government, only institutions that work and those that extract value.

However, governments such as Taiwan and South Korea, which Acemoglu acknowledges as a successful form of authoritarian growth, provide a non-democratic, non-pluralistic path– one that China has watched closely. A&R credit much of the growth to efficient central planning and secure property rights. While true, I also think that there are two other important aspects to their comparative growth to surrounding nations.

The first involves the power of the ideas and principles themselves to retain powerful allies. The United States invested heavily in Taiwan and S. Korea so that they would serve as models for liberal economies abroad. The US's Cold War policy of containment served to economically isolate ideologically opposed countries. Capital was able to flow to nations where the ideas were “allied” with American principles, while those countries which dissented were hung out to dry by the liberal governments of the world.  Therefore, even under extractive regimes, they were economically incentivized by US foreign policy to adopt some westernized, liberal institutions.

Secondly, I reference back to my discussion before on ethnic homogeneity in the formation of institutions. Because the Taiwanese population was primarily Nationalists escaped from the mainland, the absolutist government could rule as a single party, without worry of dissent. A&R refer to successful institutions involving as many people as possible, and then quickly jump to plurality as the natural method of this. However if a group is homogenous enough, there is no need for plurality. South Korea and Japan are the two least ethnically fractured countries in the world, with Taiwan not far behind. In the same vein, the goal of the Cultural Revolution was to unite the whole population of China as one people. To a large extent, they achieved this, though with terrible sacrifice. Whether they can retain this homogeneity, continue the ethnic dominance of the Han Chinese, and unite the populace as members of the party, is another question. Certainly an open press threatens this goal. If they can, however, and continue to expand property rights (which is a big IF), it does seem that they have a chance to replicate the South Korean/Taiwanese model of homogenous, authoritarian industrialization.

This is a bit frightening, as it could also serve as the model to for Myanmar and other authoritarian regimes emerging into the world markets.  The strategy could become: eliminate all opposition, homogenize your population, and then liberalize your economy. Subsequently, the capital will begin to flow without unseating the dictatorship.

Obviously, ethnic demographics explain a very small part of the overall picture of growth in East Asia. For this week, however, integrating the idea of cultural homogeneity and the origins of successful institutions seemed like an interesting exploration. Hopefully, I did not take the idea too far beyond its base in Economic Growth and Why Nations Fail.



2the term “coaling station” was later coined by American naval strategist and expansionist Alfred Mahan, and was a guiding principle to much of the United State's imperialist tendencies in the Pacific

3 This figure might also be skewed by all the immigrants in HK on work permits/permanent resident permits

4It should be said, however, that Hong Kong did experience violent race riots in the 1920s from the Chinese population, which shook the country and the colonial elites.

5Under my assumptions, this would mean that the institutions of South Korea and Taiwan, the other two “Asian Tigers,” are not set up as pluralistic systems which embrace diversity, but rather have a much larger emphasis on “Social Capital” for economic growth. These two countries were founded as ethnically homogeneous, and have remained that way through immigration controls. I want to be careful about build too tenuous an argument around these ideas, as I do not have data to really support these ideas, but it's what came across my mind as I was reading.