Same Land, Different politics - The US - Mexican Border, Seen From Space.

Image courtesy of Chris Hadfield.

Authoritarian Growth Regimes, If Any will only be Short-lived

The Economist magazine hosted a debate between two prominent individuals: William Easterly, Professor of Economics at NYU and Dambisa Moyo, contributing editor to CNBC. They debated on the economic prospects of emerging economies for 2013 and the significance of political institutions in the process. If you just look at their profiles, you would assume that W. Easterly will always be right and Dambisa Moyo would usually be wrong when each is in opposite sides. My observation is you are probably right, at least in this specific case. Let me present why I presume so.



Traditional neoclassical models of growth and development of the 1950’s and 1960's explain the differences in per capita income between countries using differences in capital accumulation and factor productivity. They don’t presume that differences in income are explained by institutions but by savings, capital accumulation and investments. Dambisa’s central argument rests on these traditional theories that, “serious macroeconomics” of these emerging economies: debt-to-GDP ratio, the quantity and quality of labor and capital, total factor productivity, efficiency of capital and labor use, etc explain the differences. However, economic theory and empirics have come a long way from this traditional understanding of the economic dynamics of countries especially emerging economies. It suffices to recall the failures of the structural adjustment program and other similar programs that undermined the significance of existing political and socio-economic frameworks which are detrimental in a nation’s economic growth to understand the limitations of such approaches. Yes, capital is critical. Yes, labor is very important. True, an acceptable level of debt and deficit is important. Yet, it’s a far cry to rely on these factors to engineer development especially in the developing world. Empirical research has shown that economic institutions that largely rely on political institutions such as property rights, elite capture in the allocation of resources and economic opportunities are central.

The structure of political institutions and the state machinery determines the structure of these economic institutions. If the state machinery is set up in order to maintain the power and prestige of a selected few elites, it would be a fantasy to expect economic progress of any kind except for those in power. If there is any progress, it’s only in the interest of the reigning political elites and would be short-lived. Because, when a disproportionate balance is observed against the interest of those in power, it can always be reversed if deemed a threat. Experience has shown that bad states have failed their nation a repeated number of times. And, that is the greatest demonstration of why political institutions are the most critical elements in growth and development. The urge to maintain political power by the ruling elite has dominated the urge to foster economic growth. It is no mere coincidence that in 2011, the Democratic Republic of the Congo, Liberia, Zimbabwe, Burundi, Eritrea, Central African Republic, Niger, Sierra Leone, Malawi, Togo, Madagascar, Afghanistan, Guinea, Mozambique, Ethiopia, Mali, Guinea-Bissau and Uganda are the poorest nations on earth. The case of North Korea and South Korea is the closest thing to a natural experiment sufficient in its own right to understand the significance of political institutions in economic growth.

The poorest economies mentioned above have one thing in common. They have or had the most autocratic dictators in recent history. These governments tried to establish political and economic infrastructures that would benefit their kin and partners. In these economies, banks offer loans to party affiliates and wealthy associates. Competition, innovation and creativity are severely stalled and discouraged since jobs, land and access to other relevant infrastructure will be controlled by supporters and associates of the ruling party. Critical economic opportunities including jobs, better education and access to credit will be confined to party affiliates. A country might still grow when these elites invest, but it is only going to be short-lived and inadequate. This process eventually builds a scheme of intricate institutions that would preserve the power structure. The challenges are further exacerbated and sustained when the political parties are based on ethnic categories. Hence, the urge to protect and intensify economic and political power by the ruling elites would dampen any sensible effort for long term economic growth.

Similar debates in Development Economics are often elusive and fail to appreciate the precise linkages between economic growth and political institutions. The debate in “Democracy Vs. Development”, “Politics Vs. Development” and “Governance Vs. Development” which is usually mixed up and intricate needs to be clear and devoid of any mystifying jargons. It has become frequent observation, that most of the debates are nebulous and highly jargonized and devoid of empirical evidence. This has been aggravated by a continued reliance on ad-hoc cross country regressions. Such regressions, in addition to the econometric challenges, have proven to convey no substantive information in terms of explaining the causal linkages. A more effective approach is to examine the local or micro level linkages between political/governance institutions and economic outcomes.

I want to conclude by asserting that authoritarian growth regimes if any would only be short lived.

Jeffrey Sachs Vs. D. Acemoglu and J. Robinson on “Why Nations Fail”

In their interesting read "Why Nations Fail: The Origins of Power, Prosperity, and Poverty", Daron Acemoglu and James A. Robinson wonder: “Is it culture, the weather, geography? perhaps ignorance of what the right policies are?” to explain the differences in economic growth across countries. They emphasize the overriding significance of man-made political and economic institutions that underlie economic progress or underdevelopment. They invoke a wide range of instances ranging from Africa, Asia and Europe to build a new and robust theory of Political Economy that addresses the fundamental question of why nations fail and why they succeed. I am not trying to review or summarize their book. I was rather impressed by the dialogue concerning the contents of the book between Jeffery Sachs and the authors. In October, 2012, Jeffrey D. Sachs presented a review of the book

Acemoglu and Robinson reacted to his review with an astonishing vigor. This was followed by Sachs’ additional reaction to the reaction. Since, I am a big fan of open dialogues between economists, especially without the restrictive requirements of an academic journal or another publication, I am sharing it for you-development enthusiasts.

"There is no reason any country has to remain poor. Countries are NOT poor because of climate, lack of natural resources or race. Countries as locationally varied as Singapore, Mauritius, Korea, Chile, Estonia and Cayman have become relatively rich over the past few decades." argues a news paper article. "Those countries that are still relatively poor are poor because they have not put in place the necessary institutions, political structures and policies."

Africa's Statistical Tragedy

Shanta’s keynote speech at the IARIW-SSA conference on “Africa’s Statistical Tragedy” is among my favorites. It addresses a critical issue in Africa’s development: Statistical Reporting. No doubt, ‘bad’ African governments have tactless political incentive to contrive Statistics. Affirmation of the phenomena of the ‘statistical tragedy’ by the renowned World Bank economist is worthy of attention. A bolt-from-the-blue revelation of figures on economic growth and poverty reduction without a corresponding transparent and independent validation would be no more than an empty holler. Shanta asserts that African governments have continuously been perverting Statistics for political reasons.

He discusses,“The underlying problem that connects all of the other proximate causes is politics. Political factors standing in the way of Africa’s development of statistics the same way it stands in way of broad based sustained growth…the reason why this is similar to the obstacles to broad based growth is because those obstacles are also political. All the proximate obstacles to difficulties for achieving broad based growth in Africa such as infrastructure deficit, weak skills, lack of productive employment, or low productivity in agriculture; they all have their roots in politics.

The implication of these contrived statistics is extensive. It is actually much more dangerous since it limits the significance of research and decision making, unless the international community, citizens and the civil society do not have the privilege as well as the capacity to authenticate government Statistics. As Shanta has suggested, transparency and clarity in the Statistical procedures is a big first step to this end. Still, this also depends on “the good will” of African governments.

Freedom and Development

In 2012, the Freedom House indicated that only 18% of African countries are considered free. Despite some progress in the 1980’s Africa’s progress towards a democratic and free society has been largely hampered. The most important problem remains lack of strong political will on the part of African governments to commit to progress and democratization. Several of these governments would try to convince you that democracy and freedom is not a priority, at least not for Africans. Others would tell you that they are having elections every four or five years and thus have become democratic states. Still, others assert dictatorship or as they call it “the developmental state” is proven to be much more successful in advancing economic growth and prosperity, often citing China as a case in point to justify their argument. Though archaic in its own right, the last argument also rests on the character of the government.

Unfortunately for these African dictators, almost all the developed countries of the world experienced a well-structured, sustained and often irrefutably spectacular progress in all aspects of society not using "the Chinese model". While the socio-economic and political repercussions of the Chinese model of development is yet to be revealed, it’s no justification to restrain free thinking and free expression, which by themselves are engines of creativity and positive dynamism in any society.