Jul
27

Colonial Impact & Legacy

  • Acemoglu and Robinson, in their widely read Why Nations Fail (2014), have an excellent example of the immediate and long-term legacy impacts of colonialism, which is worth quoting at length (p. 249-250):

The extractive institutions created by the Dutch in the Spice Islands had the desired effects, though, in Banda this was at the cost of fifteen thousand innocent lives and the establishment of a set of economic and political institutions that would condemn the islands to underdevelopment. By the end of the seventeenth century, the Dutch had reduced the world supply of these spices by about 60 percent and the price of nutmeg doubled.

The Dutch spread the strategy they perfected in the Moluccas to the entire region, with profound implications for the economic and political institutions of the rest of Southeast Asia. The long commercial expansion of several states in the area that had started in the fourteenth century went into reverse. Even the polities which were not directly colonized and crushed by the Dutch East India Company turned inward and abandoned trade. The nascent economic and political change in Southeast Asia was halted in its tracks.

To avoid the threat of the Dutch East India Company, several states abandoned producing crops for export and ceased commercial activity . Autarky was safer than facing the Dutch. In 1620 the state of Banten, on the island of Java, cut down its pepper trees in the hope that this would induce the Dutch to leave it in peace. When a Dutch merchant visited Maguindanao, in the southern Philippines, in 1686, he was told, "Nutmeg and cloves can be grown here, just as in Malaku. They are not there now because the old Raja had all of them ruined before his death. He was afraid the Dutch Company would come to fight with them about it." What a trader heard about the rule of Maguindanao in 1699 was similar: "He had forbidden the continued planting of pepper so that he could not thereby get involved in war whether with the [Dutch] company or with other potentates." There was de-urbanization and even population decline. In 1635 the Burmese moved their capital from Pegu, on the coast, to Ava, far inland up the Irrawaddy River.

…as in the Moluccas, Dutch colonialism fundamentally changed their economic and political development. The people in Southeast Asia stopped trading, turned inward, and became more absolutist. In the next two centuries, they would be in no position to take advantage of the innovations that would spring up in the Industrial Revolution. And ultimately their retreat from trade would not save them from Europeans; by the end of the eighteenth century, nearly all were part of European colonial empires.

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Jul
23

Why Nations Fail

Why Nations Fail (2012), by Acemoglu and Robinson, is probably one of the most influential development studies books of the last decade. Although the idea itself is not new, the authors make a details and persuasive argument that institutions are a primary reason for national wealth and poverty. They write: "The central thesis of this book is that economic growth and prosperity are associated with inclusive economic and political institutions, while extractive institutions typically lead to stagnation and poverty" (p. 91). In summary, they argue:

  • "Nations fail today because their extractive economic institutions do not create the incentives needed for people to save, invest, and innovate. Extractive political institutions support these economic institutions by cementing the power of those who benefit from the extraction. Extractive economic and political institutions, though their details vary under different circumstances, are always at the root of this failure." (p. 372)

The book offers numerous examples, past and present, developing and developed. In this regard, the book is rich in content for those seeking evidence of the importance of political and economic institutions. These examples include:

  • "The United States is far richer today than either Mexico or Peru because of the way its institutions, both economic and political, shape the incentives of businesses, individuals and politicians. Each society functions with a set of economic and political rules created and enforced by the state and citizens collectively." (p. 42)
  • "The modern Democratic Republic of Congo remains poor because its citizens still lack the economic institutions that create the basic incentives that make a society prosperous. It is not geography, culture, or the ignorance of its citizens or politicians that keep the Congo poor, but its extractive economic institutions. These are still in place after all these centuries because political power continues to be narrowly concentrated in the hands of an elite who have little incentive to enforce secure property rights for the people, to provide basic public services that would improve quality of life, or to encourage economic progress." (p. 90-91)

The authors present these examples without discounting or downplaying the role of colonialism and colonial legacies within these institutions (e.g. pages 9, 249), and without neglecting the purposeful creation of exclusion:

  • "In South Africa the dual economy was not an inevitable outcome of the process of development. It was created by the state. In South Africa there was to be no seamless movement of poor people from the backward to the modern sector as the economy developed. On the contrary, the success of the modern sector relied on the existence of the backward sector, which enabled white employers to make huge profits by paying very low wages to black unskilled workers. In South Africa there would not be a process of the unskilled workers from the traditional sector gradually becoming educated and skilled, as Lewis's approach envisaged. In fact, the black workers were purposefully kept unskilled and were barred from high-skill occupations so that skilled white workers would not face competition and would enjoy high wages." (p. 269)

There are opportune moments when change can occur, they describe as critical junctures, which are reinforced by positive (virtuous) or negative (vicious) feedback loops.

  • "The Black Death is a vivid example of a critical juncture, a major event or confluence of factors disrupting the existing economic or political balance in society. A critical juncture is a double-edged sword that can cause a sharp turn in the trajectory of a nation. On the one hand it can open the way for breaking the cycle of extractive institutions and enable more inclusive ones to emerge, as in England. Or it can intensify the emergence of extractive institutions, as was the case with the Second Serfdom in Eastern Europe." (p. 101)

And, glimpses of hope for contemporary examples of transitions to more inclusive economic and political institutions:

  • "The rise of Brazil since the 1970s was not engineered by economists of international institutions instructing Brazilian policymakers on how to design better policies or avoid market failures. It was not achieved with injections of foreign aid. It was not the natural outcome of modernization. Rather, it was the consequence of diverse groups of people courageously building inclusive institutions. Eventually these led to more inclusive economic institutions. But the Brazilian transformation, like that of England in the seventeenth century, began with the creation of inclusive political institutions." (p. 457)

Briefly, the book offers reflections on aid, based upon the findings of the book:

  • "…the cycle of the failure of foreign aid repeats itself over and over again. The idea that rich Western countries should provide large amounts of "developmental aid" in order to solve the problem of poverty in sub-Saharan Africa, the Caribbean, Central America, and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions – which result in lack of property rights, law and order, or well-functioning legal systems and the stifling dominance of national and, more often, local elites over political and economic life." (p. 452-453)
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