Politics through the Lens of Economics

Lecture 14

Prosperity with extractive institutions?

January 22, 2019

Masayuki Kudamatsu

Chapter 5

Chapter 3 on South Korea & Caribbean Islands

and Chapters 14-15 on China

of Why Nations Fail

Today's theme:

unsustainable growth under extractive institutions

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Today's Road Map

Inclusive economic institutions permitted

South Korea

Caribbean islands in 18th century

Allocation of resources into highly productive sectors

Soviet Union

Political centralization

Neolithic Revolution by Natufians

Kuba Kingdom in Congo

Today's Road Map (cont.)

Soviet Union

No incentive for innovation

Infighting among the elite

Mayan city states

China since 1976 as growth under extractive institutions?

Today's Road Map

Inclusive economic institutions permitted

South Korea

Caribbean islands in 18th century

Allocation of resources into highly productive sectors

Soviet Union

Political centralization

Neolithic Revolution by Natufians

Kuba Kingdom in Congo

Today's theme:

unsustainable growth under extractive institutions

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Inclusive economic institutions permitted

Elite in extractive political institutions

may allow some inclusive economic institutions

This happens when (as argued on p. 92)

Elite feel secure enough about their political power

cf. Elite's fear of creative destruction (Lecture 2)

Image source: Wikimedia Commons

Seized power in a military coup

1961

1963

Won presidential election

(& re-elected in 1967, 1971)

1972

Closed national legislature

Became dictator

Political institutions: not pluralistic

South Korea under President Park (1961-1979)

Park Chung-hee

Assassinated by his guard

1979

Image source: Philip Cho

Promotion of export industries

i.e. Economic institutions: Inclusive

(secure property rights / public service provision)

Exporting firms: exempted for import/export taxes

National banks provide loans for export

etc.

For more detail, see Westphal (1990)

Note: political centralization needed to implement such policies

President Park awards a trophy for best export performer 

South Korea under President Park (1961-1979) (cont.)

GDP per capita (constant 2010 US$)

Data source: World Bank

South Korea under President Park (1961-1979) (cont.)

Rapid economic growth as a result

South Korea under Park is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Today's Road Map

Inclusive economic institutions permitted

South Korea

Caribbean islands in 18th century

Allocation of resources into highly productive sectors

Soviet Union

Political centralization

Neolithic Revolution by Natufians

Kuba Kingdom in Congo

Today's theme:

unsustainable growth under extractive institutions

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Caribbean islands in 18c

Sugar plantation (with slaves from Africa) 

made Barbados, Cuba, Haiti, & Jamaica

the world's richest places at that time

Image source: worldatlas.com

Caribbean islands in 18c (cont.)

Barbados, Cuba, Haiti, & Jamaica

all had extractive institutions (cf. Lecture 2)

Image source: worldatlas.com

Caribbean islands in 18c (cont.)

Demand for sugar       in Britain during 18th century

Annual per capita consumption of Sugar in Britain

1704

1800

4 pounds

18 pounds

(1 pound = 0.4536 kg)

source: Mintz (1985), reported in The Guardian

Sugar production: highly productive

Caribbean islands in 18c (cont.)

Plantation owners

allocate their resources (land and slaves) into sugar production

Image source: Wikimedia Commons

A 19th-century lithograph by Theodore Bray showing a sugarcane plantation.

 

On right is "white officer", the European overseer, watching plantation workers.

18c Caribbean islands is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Soviet Union since 1928

Joseph Stalin

Rose to the top by 1927 by purging his opponents

Image source: Wikimedia Commons

i.e. Extractive political institutions

Initiated state-led industrialization from 1928

Soviet Union since 1928 (cont.)

Farmer collectivization to tax agriculture

Abolish private property rights

Herd all farmers into collective farms run by Communist Party

Propaganda poster for collective farms in 1933

Image source: Wikimedia Commons

Agricultural outputs in collective farms:

Reallocated by the government to factory builders & workers

Note:

political centralization needed for such resource reallocation

Today's theme:

unsustainable growth under extractive institutions

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Soviet Union since 1928 (cont.)

Heavy industry: highly productive for Soviet Union

Most Russians lived in countryside before 1928

Technologies: very backward relative to those in Europe and U.S.

Resources (capital & labor) used more productively

by being allocated from agriculture to heavy industry

Image source: Wikimedia Commons

Soviet Union since 1928 (cont.)

GDP grew at 6% a year from 1928 to 1960

Prosperity as a result

Until late 1970s, Westerners believed socialism was the future

Nobel laureate Paul Samuelson predicted in 1980:

Soviet Union would overtake U.S. in GDP by 2002

See Levy and Peart (2011) for more

Image source: Wikimedia Commons

Soviet Union until the 1970s is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Today's Road Map

Inclusive economic institutions permitted

South Korea

Caribbean islands in 18th century

Allocation of resources into highly productive sectors

Soviet Union

Political centralization

Neolithic Revolution by Natufians

Kuba Kingdom in Congo

Today's theme:

unsustainable growth under extractive institutions

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Natufians

People living in present-day Israel

around 10,000 BC

Image source: Wikimedia Commons

Thought to be

the world's first human beings

who started agriculture

How Natufians started agriculture

After 9600 BC

Global temperature rose by 7 degrees in less than a decade

Around 9500 BC

Natufians started sedentary life with hunting and gathering

About 500 years later

Natufians started agriculture

Emmer wheat

Two-row barley

Peas

Lentils

Why Natufians became sedentary

Political centralization:

necessary for sedentary life to be feasible

Benefit of sedentary life

Easy to take care of children & the elderly

Cost of sedentary life

Possible to store food

No need to carry around heavy tools for cooking

Need to create:

rules (e.g. property rights) to prevent conflicts

institutions (e.g. judges, police) to enforce rules

Disagreement cannot be resolved by moving away

Evidence for Natufian political centralization

Some, but not all, people were buried with:

Imported goods from a distant area (e.g. obsidian)

Ornaments (necklaces, garters, bracelets)

Image source: Real Archaeology

A large, plastered building amid 50 round huts

Most likely a chief's house

Natufians are an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Kuba Kingdom in 17th-century Congo

Source: Map 6 of Why Nations Fail

(cf. Lecture 2)

Image source: British Museum

Founded around 1620 by

Shyaam a-Mbul a Ngoong

Portrait statue of Shyaam a-Mbul

late 18th century

Bureaucracy to collect taxes

Legal system & police force

Kings checked by council

Trial by jury

Political centralization

Kuba Kingdom in 17th-century Congo (cont.)

Kuba Kingdom in 17th-century Congo (cont.)

Economic prosperity as a result

Adoption of American crops

(maize & cassava)

Younger men allowed to work on farms

Only married men work on farms (unmarried ones for soldiers)

Age of marriage lowered from 35 to 20

Food production doubled

Image source: lima-europe.eu / mypady.com

Kuba Kingdom is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Kuba Kingdom in 17th-century Congo (cont.)

Impacts still seen in the 1950s

The Bushong

inside the Kingdom

Boundary of Kuba Kingdom: delineated by the Kasai River 

The Lele

outside the Kingdom

Subsistence farming

Market exchanges

Mixed farming

5 crops rotated every 2 year

2-3 maize harvests a year

Cultivate a single crop

 

1 maize harvest a year

Hunting without nets

Law and order

Each village fortified

Today's Road Map (cont.)

Soviet Union

No incentive for innovation

Infighting among the elite

Mayan city states

China since 1976 as growth under extractive institutions?

Today's theme:

unsustainable growth under extractive institutions

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Incentive schemes in Soviet Union

Bonus system introduced in 1931

Workers receive bonus (up to 37% of wage)

if they meet output targets

Kills incentive for innovation

Resources for innovation: diverted to meet the target

Targets based on previous production level

Bonus paid monthly vs. Innovation takes time

1

2

3

No reason to raise output by innovation

Incentive schemes in Soviet Union (cont.)

Output targets are set in terms of quantity, not value

Target set in tons

e.g.

Each sheet as heavy as possible

Target set in areas

Each sheet as thin as possible

Target set in tons

Too heavy to hang from ceilings

Steel sheets

Chandeliers

Image source: Getty Images

Image source: liveauctioneers.com

Incentive schemes in Soviet Union (cont.)

Innovation bonuses introduced in 1946

Innovators receive monetary rewards

Incentive to invent valueless products

Rewards: based on the prices set by the government

Upper limit of bonus: wage bill of a firm

No incentive to invent machines to economize on labor

Creates a wrong kind of incentive for innovation

1

2

Incentive schemes in Soviet Union (cont.)

Punishment on shirking

20 minutes of unauthorized absence from workplace

6 months of hard labor & 25% cut in pay

Didn't create incentive for innovation

1/3 of adult population (36m): found guilty for 1940-1955

Soviet economy since the 1970s

Economic growth slowed down

Image source: Wikimedia Commons

Soviet Union since the 1970s is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Today's Road Map (cont.)

Soviet Union

No incentive for innovation

Infighting among the elite

Mayan city states

China since 1976 as growth under extractive institutions?

Today's theme:

unsustainable growth under extractive institutions

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Mayan city states (AD 250-900)

Image source: Multiverse

People spoke closely related languages

Developed a writing system

Image source:

Wikimedia Commons

Political centralization in Mayan city states

During AD 100-300

A centralized state emerged and consolidated in Tikal

A king (k'ubul ajaw) and aristocrats organized society

Image source: PBS

But no popular participation

Extractive political institutions

Political centralization in Mayan city states (cont.)

Tikal kings

raised tribute from farmers & organized labor

to build great monuments

Tikal Temple I, built circa 732 AD

Image source: Wikimedia Commons

e.g.

Economic prosperity of Mayan city states

Extensive occupational specialization

potters, weavers, woodworkers, tool & ornament makers

Traded goods include:

obsidian, jaguar skins, marine shells, cacao, salt, feathers

Invention of cement (independently from Ancient Rome)

Wall & columns

made of Mayan concrete

# of buildings with years inscribed

AD 514 10
AD 672 20
Mid-8th century 40
9th century
10th century

Estimated population of Copan

AD 400-499 600
AD 750-799 28,000
(more than London/Paris)
AD 900
AD 1200

Economic prosperity of Mayan city states (cont.)

Mayan city states until 8th century is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Mayan city-states after 8th century

Collapse of centralized states

No record of kings' names after AD 810

Royal palace abandoned about the same time

Last king ascended to the throne around AD 795-800

Last dated monument: from AD 810

City abandoned soon after

Quirigua

Copan

Image source: PBS

Mayan city-states after 8th century (cont.)

Reasons for the collapse of Mayan city states: unknown

Extractive institutions may have caused

infighting over wealth extracted from people

Mayan city-states after 8th century (cont.)

Constant warfare

Inscriptions record the sequence of conflicts

Source:

Map 10 of Why Nations Fail

City states fought each other

Mayan economic decline since 9th century

# of buildings with years inscribed

AD 514 10
AD 672 20
Mid-8th century 40
9th century
10th century

Estimated population of Copan

AD 400-499 600
AD 750-799 28,000
(more than London/Paris)
AD 900
AD 1200

10 per year

0 per year

15,000

600

Mayan city states since 9th century is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

Today's Road Map (cont.)

Soviet Union

No incentive for innovation

Infighting among the elite

Mayan city states

China since 1976 as growth under extractive institutions?

China under Mao Zedong (1949-1976)

Portrait of Mao Zedong

at Tiananmen Gate

Political institutions: extractive

No political organizations allowed other than Communist Party

Mao Zedong dominates the Party

During the Cultural Revolution (1966-1976)

opponents: killed, arrested, sent into exile

"The more people you kill, the more revolutionary you are." (Mao Zedong)

China under Mao Zedong (1949-1976) (cont.)

Internal passport for Chinese citizens

Image source: The Express Tribune

Economic institutions: extractive

Property rights abolished

All land nationalized (landlords executed)

Labor mobility:

tightly regulated by hukou system since 1958

State monopoly of selling rice and grain

through which farmers are heavily taxed

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure for everyone

Non-existent

Occupational choice

Free

Limited

via mobility restriction

Entry of

new businesses

Free

Prevented by

monopolies

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

That is...

China under Mao Zedong (1949-1976) (cont.)

Economic stagnation

GDP per capita hovers around $200 (constant 2010 US dollars)

from 1960 to 1976

Source: World Bank

China under Deng Xiaoping (1978-)

Inclusive economic institutions permitted

Household Responsibility System (1983)

Give farmers the right to retain profits from produce (usufruct right)

Mandatory state purchase of grain: abandoned (1985)

New firms:

can enter and compete with state-owned firms (1979)

Township Village Enterprises in rural areas

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure in terms of retaining profits

Non-existent

Occupational choice

Can switch from farming to industry

Limited

via mobility restriction

Entry of

new businesses

Free for selling grain

Prevented by

monopolies

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

That is...

Prosperity in China since 1978

1982

1993

2004

2015

GDP per capita (Constant 2010 US$) grew rapidly

6,000

4,000

2,000

0

Source: World Bank

Agricultural production increased

Grain output grew by 33% from 1978 to 1984

with fewer people in agriculture

China since 1978 is an example of:

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

No incentive for innovation

Infighting among the elite

But will Chinese growth be sustained?

No incentive for innovation

Labor mobility:

still tightly regulated by hukou system

Internal passport for Chinese citizens

Image source: The Express Tribune

Difficult to enter new markets w/o the support of Communist Party

Private businesses:

allowed unless competing with state companies

Dai Guofang:

Jailed for 2004-09 and found guilty on minor charge

runs a low-cost steel company

to compete with state-owned factories

Image source: finance.people.com.cn

economic institutions
Secure
for everyone
Property rights Insecure
for majority of people
Free Occupational
choice
Forced labor
Free Entry of new businesses Prevented by monopolies
Unbiased System of laws Biased for
the powerful/rich
Promoted Public service provision Discouraged

Economic Institutions

Inclusive

Extractive

Property rights

Secure for everyone

Insecure for

non-Party members

Occupational choice

Free

Entry of

new businesses

Free

Prevented by

state enterprises

System of laws

Unbiased

Biased for

the powerful / rich

Public service provision

Provided

Limited

That is...

Limited

via mobility restriction

Economic growth under extractive institutions

Political centralization

Inclusive economic institutions permitted

Resources allocated to highly productive sectors

Collapse of economic growth

?

No incentive for innovation

Infighting among the elite

But will Chinese growth be sustained? (cont.)

Innovation in China today

Why Nations Fail was written in 2012

Since then Chinese economic growth appears to have shifted

from catch-up to "creative destruction"

(cf. 7 from Japan)

Magazine articles such as "China Is Innovating Faster Than You Imagine" appeared in 2018

Does sustained economic prosperity

always need inclusive institutions?

Open question:

Your to-do list until next class

Prepare 9-minute presentation on your term paper 

(and 9 minutes for discussions)

1

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