Given the book’s complexity, I went for a two-part post. First part dwells a bit deeper into the recurring arguments present in the book, while the second one will try to show an alternative perspective on the source of global inequality.
One of the classes I was busy following last semester was European Economic History. In somewhat preparation for this class, I took up a book I had been willing to read for a long time. Why Nations Fail by Acemoglu and Robinson is considered a good starting point when studying the history of global inequality. I figured the topics covered inside could give me a nice intro for the upcoming classes. It offers interesting insights into many regional developments that shaped a given society and set it up for what it is today. While I certainly am not experienced enough to criticize a monumental book such as this one, I did feel that some of the repeating arguments and examples were just too simple. Especially when considering a complex topic such as global inequality. Thankfully, EEH classes managed to alleviate some of these feelings and point to more satisfying conclusions as I try to explain below. Having said this, I am far too afraid to write a traditional book review on this, hence the more general “overview” title of this post.
Story of 2 cities
The book starts with a comparison of two cities separated by the US-Mexico border. Nogales, Arizona, and Nogales, Sonora. It tries to capture distinct differences in their everyday reality, even though they can geographically be considered the same city. This example is constantly being reintroduced in the book. Especially in the second chapter “Theories that Don’t Work”, authors come back to it in order to disregard geographical or ignorant (i.e., racist) sources of global inequality. They set themselves up nicely to cover the source of global inequality through their prism - that being institutions.
THE CITY OF NOGALES is cut in half by a fence. If you stand by it and look north, you’ll see Nogales, Arizona, located in Santa Cruz County. The income of the average household there is about $30,000 a year. Most teenagers are in school, and the majority of the adults are high school graduates. Despite all the arguments people make about how deficient the U.S. health care system is, the population is relatively healthy, with high life expectancy by global standards.
The people of Nogales, Arizona, can go about their daily activities without fear for life or safety and not constantly afraid of theft, expropriation, or other things that might jeopardize their investments in their businesses and houses. Equally important, the residents of Nogales, Arizona, take it for granted that, with all its inefficiency and occasional corruption, the government is their agent. They can vote to replace their mayor, congressmen, and senators; they vote in the presidential elections that determine who will lead their country. Democracy is second nature to them.
Mexico, however:
Life south of the fence, just a few feet away, is rather different. While the residents of Nogales, Sonora, live in a relatively prosperous part of Mexico, the income of the average household there is about one-third that in Nogales, Arizona. Most adults in Nogales, Sonora, do not have a high school degree, and many teenagers are not in school. Mothers have to worry about high rates of infant mortality. Poor public health conditions mean it’s no surprise that the residents of Nogales, Sonora, do not live as long as their northern neighbors. They also don’t have access to many public amenities. Roads are in bad condition south of the fence. Law and order is in worse condition. Crime is high, and opening a business is a risky activity.
In contrast to their northern neighbors, democracy is a very recent experience for them. Until the political reforms of 2000, Nogales, Sonora, just like the rest of Mexico, was under the corrupt control of the Institutional Revolutionary Party, or Partido Revolucionario Institucional (PRI). How could the two halves of what is essentially the same city be so different? There is no difference in geography, climate, or the types of diseases prevalent in the area, since germs do not face any restrictions crossing back and forth between the United States and Mexico. Of course, health conditions are very different, but this has nothing to do with the disease environment; it is because the people south of the border live with inferior sanitary conditions and lack decent health care.
The argument later expands: the USA managed throughout its history to develop stable institutions that allowed for a well-functioning city in an unwelcoming geographic area. However, Mexico’s history is heavily marked by colonialism and later despot rule. Its institutions do not capture the total potential of the society and do not maintain order in much better-situated cities, let alone in unforgivable climates to the north such as Nogales.
Introducing chapters also deal with pre-historic/ancient societies where you often find yourself thinking about the “chicken or the egg” problem. What came first? Did early civilizations or states first set up institutions that created primitive welfare surroundings for their inhabitants/citizens allowing them to reach their full potential later on? Or, did the abundance of natural resources/geography force them to create hierarchical structures that allowed for a more optimal form of social organization? Authors push the narrative that institutions are key. While it is obvious that some institutions better control society’s wealth (natural resources & economic power are encapsulated here) than others, it is hard to imagine a wealthy or successful state in unwelcoming, resource-scarce areas, exclusively driven by a set of institutions.
2 types of institutions
1.) Inclusive political institutions
Inclusive economic institutions, such as those in South Korea or in the United States, 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. To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers.
Inclusive institutions = money-making machines should go brrr for everyone, in theory at least…
2.) Extractive political institutions
Private property is nonexistent in North Korea. In colonial Latin America there was private property for Spaniards, but the property of the indigenous peoples was highly insecure. In neither type of society was the vast mass of people able to make the economic decisions they wanted to; they were subject to mass coercion. In neither type of society was the power of the state used to provide key public services that promoted prosperity. In North Korea, the state built an education system to inculcate propaganda, but was unable to prevent famine. In colonial Latin America, the state focused on coercing indigenous peoples. In neither type of society was there a level playing field or an unbiased legal system. In North Korea, the legal system is an arm of the ruling Communist Party, and in Latin America it was a tool of discrimination against the mass of people. We call such institutions, which have opposite properties to those we call inclusive, extractive economic institutions—extractive because such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.
Extractive institutions = money-making machines might go brrr for some people, in theory at least…
2 problems I had
The institutional overview the authors give is pretty vague/general. In no other passage of text do the authors try and contextualize more firmly these phenomena. Especially inclusive institutions of our time. I understand they are offering a descriptive approach, however, it would be nice to see a modern example of an inclusive institution such as the one below offered by the Venetian Republic (which Dubrovnik copied as well!).
In the Middle Ages, Venice was possibly the richest place in the world, with the most advanced set of inclusive economic institutions underpinned by nascent political inclusiveness. (…)
One of the key bases for the economic expansion of Venice was a series of contractual innovations making economic institutions much more inclusive. The most famous was the commenda, a rudimentary type of joint stock company, which formed only for the duration of a single trading mission. A commenda involved two partners, a “sedentary” one who stayed in Venice and one who traveled. The sedentary partner put capital into the venture, while the traveling partner accompanied the cargo. Typically, the sedentary partner put in the lion’s share of the capital. Young entrepreneurs who did not have wealth themselves could then get into the trading business by traveling with the merchandise. It was a key channel of upward social mobility. Any losses in the voyage were shared according to the amount of capital the partners had put in. If the voyage made money, profits were based on two types of commenda contracts. If the commenda was unilateral, then the sedentary merchant provided 100 percent of the capital and received 75 percent of the profits. If it was bilateral, the sedentary merchant provided 67 percent of the capital and received 50 percent of the profits. Studying official documents, one sees how powerful a force the commenda was in fostering upward social mobility: these documents are full of new names, people who had previously not been among the Venetian elite. In government documents of AD 960, 971, and 982, the number of new names comprise 69 percent, 81 percent, and 65 percent, respectively, of those recorded.
I cannot recall a passage of text that offers a similar example based on contemporary time. This is a shame, as I believe there are plenty of possible routes to take considering the expansion of redistributive politics after WWII. Extractive institutions are covered with many examples to be fair, but often rely on authoritarian moves by evil elites as simplistic conclusions.
The second issue is China which is “kept at a distance”. Sort of like: “Sure, the growth is rapid, but if they don’t change to more inclusive institutions soon, North Korea’s scenario is possible”. In hindsight, this view of China is proving to be rather wrong. As the authors constantly equate free markets with inclusive institutions, CCP’s growing power seems to go against the authors’ idea of inclusivity. I like to believe I’m well aware of China’s ruthless competition forces within its society, but their fundamental disregard for democratic norms places the country in the extractive “cabinet”.
What interests me is today’s POV of the book’s authors. Given that states are involving themselves directly in the market’s outcomes and social norms (COVID-19 as an obvious example), what gradation of inclusiveness would they give them? It seems as though the leading world powers have been moving away from untethered free market forces. Whether it be through the new industrial policy, huge antitrust cases (here & here), or wide subsidies, world governments are starting to pull more strings than ever. I feel this is not necessarily bad, and will probably result in more equality overall. The question remains relevant due to the duality of the book’s structure. Either-or, rarely “in-between” answers are offered. My guess is they would agree with these policies as they are trying to tap back into the middle-class’ potential. Something that was neglected for quite some time.
Please feel free to comment your views or criticisms in the comments below, or just directly respond to the same e-mail you received this post in.
Stay tuned for Part II!