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W3 Analysis on Why Nations Fail.docx

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University of British Columbia
ECON 255
Ashok Kotwal

Reading Week 3: Poverty and Inequality [Abstract] - The occurrence of poverty  it is there but hard to determine  problem with data collection • How many poor people are there in the world, and how many are there likely to be in 2015? • In which countries and regions is poverty falling? • How is the composition of global poverty changing and where will poverty be concentrated in the future? - These are central questions for which we currently have few, if any, answers. This policy brief attempts to fill this gap by providing a best approximation in response to each of these questions, before offering policy recommendations based on these findings. VIDEO: Why Nations Fail by Daron Acemoglu - Research Question: Why Some Countries are Rich and Some are Poor?  Usual answer: rich economies usually adopt growth enhancing economic policy  Problem: it doesn’t answer why some countries adopt the growth enhancing policy and some do not  Try to approach politically and economically [Gist] - Began by asking question: What are the political constraints that prevent the forces of market from being used for economic growth? To answer this, reference will be made to those figures:  Adam Smith  Henry George - Analysis on the patterns of income per capita purchasing power parity : 1) There is a huge difference between the income per capita between each country  large color of the globe is covered by dark color (the size of poverty is huge globally)  less than $2000 2) There’s a distinct geographic pattern on the income inequalities  some parts like Sub- Saharan Africa, parts of Asia : are concentrated with poverty, darker colors in South America than North America, lighter color in Western Europe and much lighter color in Australia and New Zealand 3) Timing of the differences  Acemoglu uses Adam Smith’s The Wealth of Nation to explain this  Adam Smith asks questions: Wth some nations are wealthy and where does the wealth originate?  during the 18 century, income inequality wasn’t that big but in today’s time, the gap between the poor and the rich is 4,5 times - This pattern also suggests that there is a difference in the growth between nations - Figure by Agnes Madison on Lay of the Land  The graph is on an exponential scale  the trend shows that income between nations is diverging at a much faster rate starting in the 1800  it spread among the Western Europe and the nearby countries, but why it happened to them in particular and not other nations (Africa, Latin America, and Asia)? - Historical approach to explain the difference in growth:  The beginning of the society in Latin America which is also the beginning of colonization in Latin America  Spaniards sailed to America and began their invasion. The invasion initially progressed in the South America (The History of Pizarro) in 1560  incentive: encounter with the silver  then the Spaniards founded Buenos Aires which has the climate as Spain  however, the colonization of BA and Rio de la Plata (?) failed just like most of the Europeans because the Spaniards tried to enslave the locals to work, force them to work, produce food for themselves and find gold and silver that they can extract  In BA, the people the Spaniard encountered: the Charruas and Querandi were very mobile, sparsely settled, and essentially they are the hunter-gather level of civilization  These people were also very resistant and the Spaniards had to adopt other strategy  One of the Spaniards discovered Paraguay  encountered with another type/bandit of Indians  these Indians were densely settled and they had developed a hierarchy  The colonization of the Querandi by the Spaniards was similar to the colonization of the Aztecs of the Incans  but, this strategy didn’t work on Buenos Aires because the conditions are different and didn’t help the Spaniards’ invasion th  Another example is the North American invasion by the British  in the early 17 century, the British, under the Virginia Company send a colonization force to NA  the story of John Smithson and the Pocahontas (?)  just like what happens to the Spaniards in Buenos Aires, the Indians in North America were very mobile, sparsely settled and very uncooperative to the British  the British, like the Spaniards also used the same strategy : capture the Indians, enslave them, extract their gold and take over the hierarchy  Continuing from the North American example, the Virginian company decided to do change their strategy  the Virginia company brought their slaves that work for them to North America (this too, doesn’t work)  Quote the laws that were passed by the 2 leading directors (Governors of the Virginia company – Sir Thomas Gateson and Sir Thomas Dale)  Anything that you do is punishable by death  Logic that attempts to prevent these people from trading with the Indians  it wasn’t very profitable to enslave the Indians and the slaves that they brought in  anyone can run away and opened a settlement far away from the Virginian settlement  so, the solution to prevent the slaves from running away is punishment by death  this threat too didn’t work  Strategy #3: Head Right System and the General Assembly: the Virginians started to give land to the settlers  the local leaders only have to pay tax  but, it wasn’t enough because there was a trust problem between the British and the local leaders  the local leaders demanded for political rights and economic incentive  this system during James Town spread to the other part of North America where the local people were given the rights to participate in the economy and keep whatever they managed to produce  by having some economic ability, the local leaders have something that supported their political position - Why colonies in North America and colonies in the South ended in a different trajectory?  The identity of the colonizers is not important (British: Protestant and Spaniards: Catholic),  the only difference are: 1) in the South there were the Querandi, the Incans and the Aztecs  the climate, topography etc don’t matter too  what made Buenos Aires less attractive and Paraguay more attractive is that there were no labors that could be found in Buenos Aires. However, labors could be found in Paraguay. Hence this attracts the British  Some of other theories: 1) Theories of Natural Cultural Attitude which emphasizes religious attitude, who was the colonizer 2) Theory of Productive Differences on Agriculture which emphasizes on the cultural difference, difference in disease and environment 3) The most popular theory: The Theory of Whether the Leaders are Adopting the Right Policy Because They Can Work Out on How to Solve the Problem  The difference between the British and the Latin American colonizers was their interest  the Spaniards were interested in extracting natural resources (which can be found in the Incans, Aztec and Korani) but the British was interested in getting labors (which couldn’t be found in Buenos Aires but Paraguay) - Why institutions differ? Why they taken a divergent path? What these institutional differences do the incentives in economy?  Introduction to a few concepts: 1) Extractivist Institution: which was designed to extract from the many for the benefit of the few. This is supported by the Extractivist Political Institution. For example, the Spaniards, they replaced the social hierarchy and by doing so, they were able to gain political control over their colonies. From here, power is concentrated in the hands of the few 2) James Town Colony: the Inclusive Institution. Under this system, they have the Head Rights system where local leaders are given lands to control (secured property rights), allowed trade (people have their own land to work on and they can sell their goods in the market). Through this trade, a level-playing field is created whereby everyone can participate in the market economy. The British also introduced the justice system .The aforementioned factors are the hallmarks of the Inclusive Institution. James’ system is supported by the General Assembly (the Inclusive Political Institution) which creates a more equal distribution of political power which is also referred as Pluralism, no one has an absolute control of the political power that rests with the state Economic Institutions Inclusive Extractive Political Inclusive Circular Institution Extractiv Circular e th th  17 , 18 Barbado, wealthy farmer, had the right to hire 90% of the population, the slaves of the production helped them to make revenue. This is an example of an Extractive Political Institution because they extract from the many for the benefit of the few. The slaves don’t have the right: right to get education, to sell your labor to whoever you wanted for the vast majority of the population  Inclusive Economy on the other hand gives 90% of the rights to the population. Hypothetical question: what happens if the 90% were given the rights to political rights? Answer: they are least likely going to adapt Exctractive Economy which exploits the people  the only way for the Extractive Institution such as Slavery can survive is by giving the political rights to the beneficiaries of the slavery system. This situation falls under the Extractive Economic Institution and Inclusive Political Institution which is unstable. The same thing would happen to the other diagonal  What’s distinctive about the Inclusive Institution? : Just like the Head Rights system, Inclusive Institution creates incentive for people to invest, increase their productivity, innovate, trade, and generate economic growth  “Inclusive Economy is pretty much the only way to generate sustainable growth”: sustainable growth is defined as growth that lasts for decades, centuries (a long period of time)  this sustainable growth is only possible by technological changes. “It can’t be more of the same factories, but it must be better and better factories”  George Schumpiter (on technological change) argued more than 70 years ago that “technological changes can’t occur but with creative destruction”  related with Henry George that is: if you’re a landowner and you’re making a large rent from employing workers, the last thing you want is creative destruction because creative destruction attracts the worker away to the new industry  creative destruction is an important element of a sustainable growth  when there is CD and technological changes, economic losers will be created because they are driven out of business  creative destructions not only reallocate economic grants; it also reallocates political power. So, majority of people who are afraid of creative destruction are those with stakes (political power) and creative destruction render then obsolete (old stuff) - Why Is It That Extractive Political and Economic Institutions Are Another Mistake of History; they are not an aberration, they have their own logic, they are stable (no vicious circle) because they enrich some people, they empower some people. It just happens to be that the few who benefit from it  those few, because they possess the political power, they aren’t willing to give it up  naturally, those holding the power will be unwilling to accept technological changes and averse to economic growth because of the fear of creative destruction  considering this circumstance, the Extractive Economy will naturally emerge and once emerge, they tend to persist.  inclusive institutions develop over time. It doesn’t come out suddenly  this explains why some society remain in the Extractivist institution  The role of conflict: Extractivist economy tends to persist once they are established. But it doesn’t make everyone happy because 90% of those who are exploited are not the beneficiaries of the Extractivist institution. So, from time to time, the 90% will attempt to do something to improve their position through negotiation, slave revolt, protests, uprising (Arab Spring)  there certainly will be conflicts which are different in different societies  when the people do succeed in changing the institution, the progress of the change will often progress at a very slow pace  this slow process is known as the institutional drift which is inspired by genetic or revolutionary drift. How it works: two identical population and put them in isolated places and over time, because of mutation, they started drifting apart, they don’t communicate with each other, they have their own trajectory, in the same societies have their own trajectory. How they handle things are different  so, France, British may have a same headstart but over time, some small differences will cause the path to diverge.  hypothetical situation: if we were to rely on this small changes, the institutional drift will take a long period of time to occur  but things change not because of institutional drifts, instead, it’s because of critical junctures  critical junctures disrupt the balance of society that creates a shock by political occurrences, wars, opening of new political of social opportunities  critical juncture, because its impact is very significant, causes the society to diverge  but the problem with identifying what leads to this divergence we don’t know what it is and how to identify the factors th - Emergence of Inclusionist Institution  it took place in England in the 17 century during a period called Glorious Revolution, England deposed their monarch led by James II and was replaced by constitutional monarchy led by William Maurinch (?)  so, transfer of power shifted from the monarch to the Parliament  Glorious Revolution was a political event but it opened the door to radical changes to the economic institutions whi
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