Why Nations Fail Illustrated

Lecture 4

How extractive institutions

caused backwardness

in various empires and Somalia

October 30, 2018

Masayuki Kudamatsu

Chapter 8, pp. 120-121, & pp. 176-178

Weeks 2-4: How institutions affect prosperity

October 9

Chapter 3

October 16

Chapter 7

October 23

Chapter 8

North/South Korea

the Congo

How institutions matter for prosperity

Why did

Industrial Revolution

take place

in England?

History of England

from 13c to 19c

Extractive institutions cause poverty

Inclusive institutions lead to prosperity

Ottoman Empire

Austria-Hungary

Russian Empire

Ming/Qing dynasties

Ethiopia

Somalia 

Inclusive Economic Institutions

Economic Growth

Inclusive Political Institutions

Review 1: Inclusive institutions led to prosperity

Bill of Rights

Petitioning

Monopolies abolished

Property ownership reorganized

Attempt to ban cotton

failed

Innovation in

transportation

steam engine

iron manufacturing

cotton manufacturing

First Reform Act

Flip side of this mechanism is ...

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

Extractive institutions lead to backwardness

Today we see several examples of this mechianism

Inclusive

Extractive

Both

Plurality

and

Centralized

State

Either

Absolutist

or

Lack of

Centralization

Review 2: Extractive political institutions

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 majority of people

Occupational choice

Free

Forced labor

Entry of new businesses

Free

Prevented by monopolies

System of laws

Unbiased

Biased for the powerful / rich 

Public service provision

Provided

Limited

Review 3: Extractive economic institutions

Today's Road Map

Extractive institutions kill incentives to innovate

Spain, Ethiopia

Absolutist rulers block industrialization

Ottoman, Austrian, Russian, Chinese Empires

Lack of political centralization causes backwardness

Somalia

Today's Road Map

Extractive institutions kill incentives to innovate

Spain, Ethiopia

Absolutist rulers block industrialization

Ottoman, Austrian, Russian, Chinese Empires

Lack of political centralization causes backwardness

Somalia

Spanish Empire (1492-1808)

Spanish Empire in 1790

Source: geography.name 

Political institutions in Spanish Empire

Absolutist

Cortes (Spanish parliament)

Need to be summoned to assent to limited scope of new taxes

Represents 18 major cities only

Cannot legislate

Conflict with the Crown over taxation over 16th century

e.g. Comunero Rebellion in 1520

Eventually won by the Crown

Cortes didn't meet from 1664

Political institutions in Spanish Empire (cont.)

Decline in political centralization since 17th century

Sell public offices

Indulge in tax farming

Sell immunity from justice

Increasingly difficult for the monarch to collect taxes

Economic institutions in Spanish Empire

Insecure property right

Expropriation by the monarch

e.g.

200,000 Jews expelled, forced to sell off their land and assets at very low prices in late 15th century

Arabs expelled between 1609-14

The monarch defaulted on his debts

in 1557, 1560, 1575, 1596, 1607, 1627, 1647, 1652, 1660, 1662

Banks went bankrupt

Economic institutions in Spanish Empire (cont.)

No free entry of new businesses

Guild of merchants in Seville controls the Atlantic trade

The monarch got its share of profits

Trade within the Americas heavily regulated

To ensure silver and gold keeps flowing into Spain

Extractive Economic Institutions

Economic Stagnation

Extractive Political Institutions

Feedback loop

Monopoly of foreign trade by the Crown

Help the monarch consolidate its absolutist rule

Prevent the rise of merchant class like in England

Economic decline in Spanish Empire

% of people living in urban areas

20%

10%

In 1600

In 1700

Ethiopian Empire (c.1270-1974)

Ethiopian Empire in 1889-1913 (dark orange)

compared to today's Ethiopia (light orange)

Source: Wikimedia Commons

Political institutions in Ethiopian Empire

Absolutist

No pluralistic institutions of any kind

Emperor's power: unlimited

Centralized state

Emperor Tewodros II (1855-68)

Creates a centralized bureaucracy & judiciary

Places military governors across all provinces

who collect taxes and remit them to the emperor

Maintain independence amid European colonization of Africa

Economic institutions in Ethiopian Empire

Insecure property rights

Emperor owns all the land

No inheritance to children; returned to Emperor upon death

Take away lands every 2-3 years or even many times a year

Economic institutions in Ethiopian Empire (cont.)

Insecure property rights (cont.)

The gult system (lasted until 1974)

50%-75% of produce

No free entry of new businesses

King controls international trade, including the slave trade

Emperor

Gult holders

Peasants

Land & right to extract tributes

Military services

Tributes

Land

Backwardness in Ethiopia

Ethiopia today

Per capita income: 1/40 of England

Life expectancy: 55 years

Literacy rate: 33%

Subsistence agriculture

Lack of clean water, electricity, access to schools & health care

Today's Road Map

Extractive institutions kill incentives to innovate

Spain, Ethiopia

Absolutist rulers block industrialization

Ottoman, Austrian, Russian, Chinese Empires

Lack of political centralization causes backwardness

Somalia

Economic Growth

Winners

&

Losers

Creative destruction

Losers = Powerful

Review 4: Extractive institutions resist innovation

Extractive

Econ. Instit.

to prevent creative destruction

If

Ottoman Empire

Political institutions in Ottoman Empire

Absolutist

Sultan does not share power with anyone

Lack of centralized state

Constantly challenged by Bedouins and others in Arabic Peninsula

Right to collect taxes: sold off to tax farmers

Economic institutions in Ottoman Empire

Insecure property rights

No private property in land; all land belongs to the state

Banditry

Palestinians left the fertile land & moved up to mountains

to protect themselves from banditry

Very high tax rates imposed by tax farmers

50%-66% of what farmers produce

Economic institutions in Ottoman Empire (cont.)

No free entry of new businesses

Commerce under state control

Guilds and monopolies regulate occupation

Gutenberg printing press: banned until 1727

Invented in 1445

Adopted in Strasburg, Italy, London, Budapest

by 1500

Image source:

davincid.weebly.com

Rulers block innovation in Ottoman Empire

Until the 19th century

most books were hand-copied

Page 266 of the Gutenberg Bible, 

the first printed book in history,

made in 1450-55

Source: Figure 5-15 of Meggs (2005)

Literacy rate in 1800: 2-3%

60% for men, 40% for women in England

20% in Portugal

Backwardness in Ottoman Empire

cf.

Hapsburg/Austrian Empire (1526-1919)

Austrian Empire in 1815

Source: Wikimedia Commons

Political institutions in Austrian Empire

Absolutist

Centralized state

The emperor has no limitation on his power

No national parliament

Fewer constraints than Spanish monarchs had

Thanks to Maria Theresa (1740-80)

and Joseph II (1780-90) 

Serfdom

Migration: illegal

Guilds deter new entry in cities

Economic institutions in Austrian Empire

No freedom of occupation

No free entry of new businesses

Lords

Peasants

Unpaid labor

Fines and taxes

Land

Image source: Wikimedia Commons

Francis I (1804-1835)

New factories: banned in Vienna in 1802

Steam railway construction: banned

Horse-powered railways until 1860s

Rulers block innovation in Austrian Empire

Importing new machinery: banned until 1811

 

Factories

 

Poor people

concentrated

in cities

 Opposition

to

absolutism

150th anniversary stamp for the first horse-drawn railway in Linz-Freistadt-Budweis

Image source: Charles Cooper's Railway Pages 

Backwardness in Austrian Empire

Use of charcoal to manufacture iron until late 19c

When 90% of world iron production used coal

Textile was hand-woven until 1914

Russian Empire (1721-1917)

Russian Empire in 1865

Source: Wikimedia Commons

Political institutions in Russian Empire

Absolutist

Centralized state

Created by Peter the Great (1682-1725) 

Stripped away power from aristocrats

Abolished the Duma,

which had appointed Peter as the emperor

Created a modern bureaucracy and army

Took control over the Church

Half the population tied to land

Work for lords 3 days a week for nothing

Could be sold to another land

Economic institutions in Russian Empire

No freedom of occupation

Serfdom

Lords

Peasants

Unpaid labor

Fines and taxes

Land

Image source: Wikimedia Commons

Nicholas I (1825-1855)

Almost ousted on the day of assuming power

in the Decembrist Revolt of 1825

Actively block industrialization

Industrial exhibitions banned

Factory openings in Moscow: restricted

Railway construction: discouraged

Rulers block innovation in Russian Empire

Railway networks

in 1870

Source: Figure 15.2 of Butlin and Dodgshon (1998)

Image source: Map 13 of Why Nations Fail

Backwardness in Russian (and Austrian) Empire

Song Dynasty in China (960-1279)

Many technological innovations

But not commercialized

clocks

the compass

gunpowder

paper

paper money

porcelain

cast iron

spinning wheel

waterpower

Innovation led by the state

not by market incentives

Ming Dynasty in China (1368-1644)

Foreign trade banned for 1433-1567 (海禁令)

Qing Dynasty in China (1644-1912)

1661: People on coastal areas: banned from trade

From 1693:

The ban was lifted, then imposed again, lifted, imposed again..

No incentive to invest

Backwardness in Chinese Empires

Couldn't benefit from Industrial Revolution

Became one of the poorest countries by 1949

Today's Road Map

Extractive institutions kill incentives to innovate

Spain, Ethiopia

Absolutist rulers block industrialization

Ottoman, Austrian, Russian, Chinese Empires

Lack of political centralization causes backwardness

Somalia

Somalia

Historically dominated by 6 clan families

Every adult man has a say on political decisions

No centralized state

No written laws

No police

No legal system

Political institutions in Somalia

Pluralist

Leaders and elders have no real power

Political institutions in Somalia (cont.)

Each diya-paying group has their own informal laws, heer

A crime against a person

= A crime against his whole diya-paying group

Compensation goes not only to the victim

but also to the whole group members

If a criminal does not pay compensation,

his whole group is responsible

Each clan has several diya-paying groups

Economic institutions in Somalia

Insecure property rights

Continual conflict over water sources & grazing lands

e.g.

Conflict between Tol Ja'lo and Yuunis in 1955

A Yuunis man was wounded after a dispute with a Tol Ja'lo

Yuunis attacked Tol Ja'lo, killing one man

A Tol Ja'lo man killed one man from a Yuunis in retaliation

All-out warfare ensues for a year

British colonial administration brokers a peace deal

Backwardness in Somalia

Somalis had a written script, but they did not use it

Why? A case of the Kingdom of Taqali (19c South Sudan)

Citizens resisted the use of writing

Local elite also opposed to writing

Image source: Wikipedia

Writing in Arabic was not used

Except the king for diplomacy

It would allow the state to claim

the ownership of their lands

Written laws can't be taken back at will

Continuous civil wars since the 1980s to present (see more detail)

Class Discussion Time

Backwardness in Japan

Cash transactions still prevail

Backwardness in Japan (cont.)

Mobile internet speed is much slower than Korea and Singapore

Backwardness in Japan (cont.)

Top 20 among OECD countries in GDP per capita  (2000 constant USD in PPP)

Source: OECD.stat

1991

2017

Economic Growth

Winners

&

Losers

Creative destruction

Losers = Powerful

Extractive institutions resist innovation

Extractive

Econ. Instit.

to prevent creative destruction

If

Class Discussion Topic

Can Japan's (relative) backwardness since the 1990s

be explained by the following logic?

October 30

Chapter 4

November 6

Chapter 1

November 13

Chapter 10

United States

vs Mexico

from colonization

to early 20c

Weeks 5-7: Origins of inclusive institutions

Western

vs Eastern Europe

after Black Death

in 14c

 

Spain vs England

after Rise of Atlantic

Trade in 16c

Australia

 

French Revolution

and its spread to

Western Europe

 

Japan vs China

in 19c

Next week

Your to-do list until next class

Pick a country for your term paper

and post it on Prulu (if you haven't)

Read Chapter 4 (pp. 96-101, 105-113) & pp. 208-212

and post questions on Prulu

1

2

3

Start thinking about whether Why Nations Fail explains

economic performances of the country of your choice

Politics through the Lens of Economics (2018): Lecture 4

By Masayuki Kudamatsu

Politics through the Lens of Economics (2018): Lecture 4

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