Extractive political institutions (autocracy and empire) lead to extractive economies benefiting elites, and cannot create general prosperity save for limited periods. Inclusive political institutions (democracy, rule of law and rights for all) create inclusive economic regimes with opportunity for all, leading ultimately to prosperity. Inclusive institutions lead to creative destruction, which is essential for sustained prosperity but threatens extractive regimes, and is typically sabotaged by them. Only politically-free regimes will ultimately allow creative destruction. This is why some nations fail and others succeed.
So says this year's runaway best-seller, Why Nations Fail by Daron Acemoglu and James Robinson. The authors do not attempt an India-China comparison. But their logic suggests that India will ultimately come out ahead because of inclusive political institutions, and China will ultimately fail because of its extractive political institutions. That needs qualification. Democracies can be partly extractive — look at India's many scams — and autocracies can be partly inclusive. For this reason, democracies may fail to provide prosperity for decades just as autocracies can produce good economic results for decades. But ultimately, say Acemoglu and Robinson, the fundamentals will apply. This kernel of truth is brilliantly argued.
The book gives a mind-blowing range of historical examples across continents and centuries, from the Glorious Revolution of 1688 in Britain to the evolution of Botswana and Spanish colonisation of Argentina. One chapter is titled "What Stalin, King Shyaam (of the Congo), the Neolithic Revolution and the Maya city-states had in common, and how this explains why China's current economic growth cannot last". It sums up the breadth of this book.
Acemoglu and Robinson differ from economic historians like Douglas North in emphasising politics above all. Good institutions are the key to prosperity, historians agree. But this book says good institutions will not get established sustainably until the politics is right. You cannot depend on the modernisation process to ensure that authoritarian regimes with rising incomes automatically become democracies. Conditional foreign aid and foreign policy cannot bring about such changes either. Internal dynamics matter above all. The most important catalyst for political freedom can be a free media.
Few Indian readers are familiar with the 1688 Glorious Revolution, which the book emphasises repeatedly. The struggle between the Stuart dynasty and parliament, representing mostly large landowners and businessmen, ended in 1688 with the expulsion of James II and his replacement by William of Orange, who accepted a curtailment of royal powers and a Bill of Rights.
This set in motion a virtuous cycle, with political reforms that gradually included more and more sections of the population, culminating in universal suffrage. The authors say this political inclusion was crucial to widen economic opportunities, and explains why the Industrial Revolution began in Britain.
Other factors included British seaborne trade being largely with merchants, whereas the Spanish and French fleets were royal monopolies.
There is no historical determinism, say the authors. Luck and accident play big roles. Small differences and small changes can have huge, unpredictable consequences. Yet, they find that sustained success needs a constant widening of economic opportunity, plus economic systems that allow newcomers to sweep away the old: creative destruction. Autocrats squashed innovation, fearing this would empower a new class that would challenge them.
Many readers will question the book's equation of extractive economies with autocracy and inclusive economies with democracy. The original four Asian tigers, South Korea, Taiwan, Hong Kong and Singapore, were autocracies of some sort, and so were succeeding tigers China, Thailand, Malaysia and Indonesia. India was aflop for so long that many assumed that autocracy aided prosperity, and democracy was a hindrance. Only in the last decade has India's success altered the picture.
But the book implies that this was inevitable, and that the decline of China is no less inevitable. It says autocracies can produce sterling results for some time, even decades, but not sustainably (remember the Soviet Union). Democracies like India tend to develop virtuous cycles that eventually improve governance and reduce extractive tendencies, while autocracies tend to develop vicious cycles that increase such tendencies.
The book has a big implicit message for India: rethink themeaning of 'inclusive'. All Indian parties swear by inclusive growth, but define inclusion in terms of subsidies and reservations in jobs and education. This is vote-bank politics parading as inclusion.For Acemoglu and Robinson, inclusive growth means the spreading of opportunity to all to participate in economic activity, leading to creative destruction in which newcomers oust the old.
The IFC/World Bank ranks India 134th out of 183 countries in ease of doing business; 166th in ease of starting a business; 179th in getting a construction permit; and 182nd in enforcement of contract. These are barriers that should be attacked by any drive for inclusion. Yet, our political discourse on inclusion hardly touches on these issues.
The political process likes creation but hates destruction. So, duds like Kingfisher Airlines and Air India are propped up, crowding out newcomers. Company liquidation takes decades. Labour laws protect a unionised labour aristocracy at the cost of non-unionised ones. This is non-creative ossification. It is the opposite of creative destruction, the heart of inclusion.