Saturday, August 4, 2012

Preface - Why Nations Fail

Acemoglu and Robinson end the preface by outlining one of their goals - to better understand the "transition" from, to use North's framework - natural state societies to open access societies. They go argue that: "Fundamentally, it is a political transformation of this sort that is required for a poor society to become rich." (page 5). Bold assertion - I wonder what my fellow book clubbers make of this assertion and how they might disagree. I can think of societies that maintained a closed political order with rule of elite and still engaged in a transition - Singapore? In an important book editted by Benjamin Powell - Making Poor Nations Rich: Entrepreneurship and the Process of Economic Development a Schumpeterian alternative to transition is offered through the emphasis on entrepreneurship and the innovative work of individual agents stimulate the transition. It consists of three main parts. The first part deals with institutions and entrepreneurship. The second part is about the importance of constrained entrepreneurship on economic development in Africa, Latin America, Scandinavia, and the transitional economies of the former USSR. The final part stresses the benefit of the reforms underlying the growth spurt in entrepreneurship in China and the Republic of Ireland, and the difficulties that challenge entrepreneurship in India, New Zealand, and Botswana. Now, we might well quibble about chicken and egg - are the political institutions necessary for this creative destruction? One of the essays in Powell's book by William Baumol, a short version of his book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity (note - this would be a great book club selection). So, rather than political institutions, the seed of transition from natural state societies to open access societies has multiple and complex stimuli. I suppose that the question for better understanding the transition (which North acknowledges is Violence and the Social Orders and his earlier book Understanding the Process of Economic Changes) is very difficulty given the complexity of the process and the challenge or pretense of understanding both the beginning point for society as well as the path of change which is, arguably unique to each society. "Baumol and his co authors have identified four models of capitalist economy. The first is capitalism guided by the state, otherwise known as mercantilist capitalism. This model has been favored in Asian countries, where the state controls the banks and other financial institutions. The states underwrite low wage export oriented businesses to produce goods primarily for the world market. The problem with this kind of pratice is that governments tend to overinvest in favored industries and underinvest in those needed for their domestic use. States are also notoriously slow in responding to the demands of a changing marketplace. Secondly, there is oligarchic capitalism. This is when a wealthy elite uses the state as its personal fiefdom. This was the case of Russia shortly after the fall of the Soviet Union. However, the oligarchs are now in retreat, Putin is moving the country toward state-guided capitalism. Both of these models can work for a period of time. Russia, which is blessed with large amounts of natural resources, can probably get away with it for a longer period of time. But this is not enough to sustain long-term growth and prosperity. Thirdly, there is big-firm capitalism. This was the model used by Japan and Europe during the postwar era. Big firms can produce solid growth for many years, but as they mature they tend to settle for the status quo, rarely do they produce innovation or breakthrough technologies that foster dynamic growth. Lastly, there is entrpreneurial capitalism, clearly the authors' favorite. William Baumol, the primary author, is arguably the doyen of innovation economists. The great breakthroughs in technology are usually brought to market by individuals or small firms. This type of organization - free of the constraints of big firms - is better at creating new markets and opportunities. Most countries practice a combination of the above models. According to the authors, the US is so successful because it is a blend of big firm and entrepreneurial capitalism, arguably the optimal combinaton."

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