You can be a well cultured despot you know

Noah and Scott‘s argument about China’s culture is going nowhere. They’ve got bogged down talking about whether culture affects economic potential or not. Long story short, of course it does! Consider these two examples:

Chinese expats around south-east Asia seem more entrepreneurial and they sure as hell are richer than the locals in places like the Malay Peninsula and Thailand. Less fortunately, Black Africans are less trusting than other people and this is just one reason economic growth is more difficult there. Without being able to trust that someone will take your money, disappear into another room and come back with what you want there can be no Argos. And where would you be without Argos? A lot poorer. [1]

The reasons for these cultural traits are complex. I don’t know the Chinese, but Africa’s level of trust appears to still be badly effected by the long defunct institution of slavery; kidnapping was very common for 200 years or so in a way which the rest of the world hasn’t had to deal with. You can be culturally more entrepreneurial. Likewise, you can culturally more or less prone to trust strangers. Both of these have real effects for lots of things, including economics. There, cleared that one up for you.

But whether culture affects wealth given a certain set of economic institutions is irrelevant. What is important is whether culture can influence China’s institutions. China is still deep in the throws of catch up growth, entrepreneurship is of course very important, but not nearly as important as having institutions which allow for the full execution of whatever entrepreneurship occurs. As I said earlier:

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients…

Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right.

The only way China’s culture will significantly influence its long run – at least until it reaches say half of rich world income per capita) – growth prospects is by influencing its institutions. An entrepreneurial culture, or pragmatic culture, is completely unrelated to whether China adopts a growth friendly political framework over the next five to ten years. What matters is whether the politically powerful can be convinced/forced to become economic losers. Look at those guys at the top. Do you think they’re culturally inclined to agree to that?

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[1] Not sure if that translates to my non-British readers. Argos is a shop with a tiny shop front full of catalogues and a big warehouse full of stuff. You order at the front and stuff appears a few minutes later from the back. The flippancy of my reference is of course a little ruined by this extensive footnote.

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Why China Might Fail

I found Scott‘s post very confusing, for many of the same reasons discussed here by Noah. [1] Scott says:

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore(or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

First of all, what I agree with in the post. China is poor and has for the last 40 years not been run by bloodthirsty foreigners or a psychotic madman. Growth from the abject poverty that was 1970s China is inevitable under those conditions. What is clear from Scott’s post is that China’s growth has very little to teach the wealthy West other than “don’t let genocidal maniacs into government” something we learned the hard way a little while ago.

Scott seems to think that China has got its act together and that it isn’t in anybody’s interest to derail its development. Things will be better for everyone when China is like Singapore and therefore we shouldn’t worry that China’s growth will decline disastrously or go into reverse. Technocrats are good! Just like the technocrats in the Fed…oh never mind.

Although I kinda agree that China looks like it has a good culture, strong infrastructure and abundant human resources, so did Argentina 100 years ago, and look what happened to them. What matters are institutions, Argentina’s stank and so do China’s. I am curious that Scott seems so keen to give a clean bill of health to China’s crony-capitalist economy and dictatorial, judicially-repressed polity.

I think he is being naive. Elites rarely do the right thing because they are oh so wise, they do the right thing if they are forced to.

Think about China this way: Whether its Township and Village Enterprises or Foreign Direct Investment into Free Economic Zones, a significant proportion of the growth which China has enjoyed has been controlled by the Chinese Communist Party. Not control as centrally planning, but control as the ability to cut of freedom of action of each. This ability to cut off these developments has kept party chiefs on the same side as China’s bourgeoisie.

It becomes difficult to keep control of growth when you hit middle-income – the low hanging fruit has been picked. One reason Michael Pettis is so worried about Chinese is that consumption repression has always been at the heart of the Chinese growth model. This has been fine for capitalists operating export orientated firms or contractors building infrastructure or real estate, but again places great power in the hands of China’s elites. To reverse this would require a massive transfer of wealth and power from political control to private control. I think Scott underestimates how much the Chinese Communist Party fears the consequences of this.

You can see this in the security apparatus of the Chinese State and its repression of free speech and its tight grip on the internet. they know that as their population gets wealthier they are going to demand more freedoms and more political representation; likewise they are going to demand more economic freedom and more social mobility, something which by definition must damage the interests of the current ruling elite. Powerful magnates will arise to  challenge the power, wealth and status of the current Chinese elite.

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients.

Scott says that he cannot see a stable China with a middle-income coast and a poor interior. You can be rich and surrounded by poverty, look at North America! Just look at it! Its been rich and surrounded by poverty for centuries. China still operates a hukuo system of local registration which until very recently prevented anyone from moving anywhere without official say so. You think the Chinese can’t stymie growth by reintroducing the hukuo system of internal border control? Urban Chinese still seem pretty dismissive of “farmers” judging even by the international lot I meet at LSE.

We’re back to my new favourite book to think with: Why Nations Fail. Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right. The point isn’t to describe how China will fail, I’m not sure it will, but only to highlight that there are powerful pragmatic reasons for those in power to want China to fail.

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[1] I will not that Noah has still not commented on my rebuttal of his bullish post on the potential for Chinese industrial espionage. Noah should note that I argue Scott is wrong for the same reasons I argue he is wrong. They both slightly misidentify how the drivers of long run growth operate.

The USSR, Congolese Tribes, Trayvon Martin and Patent Reform all in one post

I’ve been reading Why Nations Fail, the blog and book. I’ve reached the section on the Soviet Union and the Lele and the Bushong – the discussions linked to above are from Paul Krugman and James Robinson, but are on very similar lines.

The Soviet Union achieved economic growth in the 1920s-1970s by moving resources, very, very violently, out of low productivity agriculture into high productivity industry. From 1930 to 1960 the Soviet Union saw growth rates of 6% a year, probably the fastest sustained rate ever seen at that time.

The Bushong and Lele are tribes that live on opposite banks of the Kasai river. The Bushong are far wealthier, more peaceful and more technologically advanced than the Lele. This was because in the early seventeenth century, on just one side of the Kasai, Shyaam formed the Kuba Kingdom. This was an absolutist and centralised collection of the local warring villages.

What links both is that in the Soviet Union, and on the Bushong side of the Kasai, elites came to power who had the incentive to move resources to high productivity sectors in order to extract more wealth for themselves. Both societies eventually stagnated – the Soviet Union at the level of a poor industrial society, the Bushong at the level of a rich agricultural one – because both lacked institutions that gave citizens incentives to innovate and invent.

Acemoglu and Robinson argue, at length and convincingly, that wealthy capitalist countries are successful because institutions in these countries are politically inclusive, giving everyone a stake in their functioning, and economically inclusive, giving everyone a chance to take whatever employment suits them and experiment to see what innovations they can make work. Only this combination creates sustained economic growth. There are echoes of Eric Jones’ Growth Recurring, which I have discussed before.

I’ve also just read Richard Seymour‘s history of lynching and its importance in understanding the murder of Trayvon Martin. Richard underlines the long tradition of American citizens being deputised into violently upholding America’s  racial hegemony. Lynching was just one part of the system of exploitation and repression blacks faced in the US.

The murder of Trayvon Martin should be seen as part of the continuation of this tradition of separating white and black space by violence in the United States. Florida’s law allowing racists to kill black people and avoid arrest if they can convince local law enforcement they were under some sort of threat. These are exclusionary political institutions in action.

The manifestly exclusionary political institutions the US still has – see also the incarceration of blacks in the US – took an even worse form in the past. These exclusionary institutions and extractive economic institutions did not however seem to significantly retard growth or innovation – although even in the US, evidence for Acemoglu and Robinson’s thesis is available, the more repressive south is poorer than the less repressive north.

The 1930s were a tragic decade macroeconomically but were the most technologically progressive decade in history, never had productivity grown so quickly. So, despite manifestly extractive institutions and exclusionary political institutions existing in the US in this period (for women as well as blacks remember) there was an explosion of innovation.

There seems to be a disconnect between incentives being important for innovation at the societal level and incentives being important for promoting innovation at the individual level. I don’t take this as evidence against the importance of institutions which promote innovation, some people had the incentive to innovate, and they pursued it with enthusiasm. The question all this seems to pose is: to what extent were these innovations individual endeavours?

What this makes me think is that many inventors do not deserve to capture the full results of their innovations. Ideas seem to be more “in the air” than the product of individual efforts. Even if inventors don’t deserve their ideas protecting, and even if it doesn’t make much sense to label something someone’s idea because they perfected it, or submitted a patent a few months or years before someone else, it may still make sense to offer them patent protection and so on to achieve the maximum possible economic growth. What policy implications this notion of desert has then is unclear.

However, synthesising Marxist analyses of race and space and the life’s work of Daron Acemoglu, James Robinson and Alexander Field isn’t something you get to do everyday. So although policy prescriptions are lacking, I hope you find the above thought-provoking.

A funny definition of the resource curse

If you’ve got some natural resource within your borders, one that lots of people want to buy, then you end up getting lots of foreign money being changed into your local currency as people buy that resource. That drives your exchange rate up and thus strangles everything except that natural resource.

That isn’t the resource curse, that’s Dutch Disease, so named because after the Dutch discovered Gas all their other businesses became uncompetitive. The resource curse is more complex than that.

Currency appreciation may be bad for producing and exporting things, but it is very good for consuming and importing things. Both of these things are good things to do, it is all about degree. To call either circumstance a curse is a misnomer. Consuming things is the point of economics, were it not why invest in a gamble to consume more in the future?

No, I think currency appreciation is a significantly smaller part of the resource curse than is the fact that the presence of valuable resources make it more profitable for elites of one shade or another to seize political and economic control of a country’s institutions.

Acemoglu and Robinson have a blog all about this.

Having an overvalued currency might depress output in a few exporting sectors a bit, having competing meglomaniacs try to take over your country will crush economic activity everywhere.

The most important thing a developing country can do is to enforce fair rules in a predictable way, natural resources and the super profits available from their sale, make it incredibly easy for one group or another to evade, subvert or supplant the law.

Daron Acemoglu is Blogging

The guy is basically top of the game in Economic History writing, seventh most cited economist according to Repec. He and James Robinson have started a blog called “Why Nations Fail” to coincide with their new book of the same title.

Summary as lifted from their site:

Is it culture, the weather, geography? Perhaps ignorance of what the right policies are?

Simply, no. None of these factors is either definitive or destiny. Otherwise, how to explain why Botswana has become one of the fastest-growing countries in the world, while other African nations, such as Zimbabwe, the Congo, and Sierra Leone, are mired in poverty and violence?

Daron Acemoglu and James Robinson conclusively show that it is man-made political and economic institutions that underlie economic success (or the lack of it). Korea, to take just one of their fascinating examples, is a remarkably homogeneous nation, yet the people of North Korea are among the poorest on earth while their brothers and sisters in South Korea are among the richest. The south forged a society that created incentives, rewarded innovation, and allowed everyone to participate in economic opportunities. The economic success thus spurred was sustained because the government became accountable and responsive to citizens and the great mass of people. Sadly, the people of the north have endured decades of famine, political repression, and very different economic institutions—with no end in sight. The differences between the Koreas is due to the politics that created these completely different institutional trajectories.

Based on fifteen years of original research, Acemoglu and Robinson marshal extraordinary historical evidence from the Roman Empire, the Mayan city-states, medieval Venice, the Soviet Union, Latin America, England, Europe, the United States, and Africa to build a new theory of political economy with great relevance for the big questions of today, including:

  • China has built an authoritarian growth machine. Will it continue to grow at such high speed and overwhelm the West?
  • Are America’s best days behind it? Are we moving from a virtuous circle in which efforts by elites to aggrandize power are resisted to a vicious one that enriches and empowers a small minority?
  • What is the most effective way to help move billions of people from the rut of poverty to prosperity? More philanthropy from the wealthy nations of the West? Or learning the hard-won lessons of Acemoglu and Robinson’s breakthrough ideas on the interplay between inclusive political and economic institutions?

Why Nations Fail will change the way you look at—and understand—the world.

Follow the blog, you will become a more fulfilled human being if you get off on learning interesting things.

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Update: Whoa, whoa, whoa, they don’t allow comments! Minus points. Bad Acemoglu and Robinson!