Why Is Latin America Poor? Based On Why Nations Fail By .

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Why Is Latin America Poor? Based on Why Nations Failby Acemoglu and RobinsonDaron AcemogluMITNovember 7, 2010.Acemoglu (MIT)Why Nations FailNovember 7, 2010.1 / 41

IntroductionThe DisparityAcemoglu (MIT)Why Nations FailNovember 7, 2010.2 / 41

Introduction10How Did We Get Here?log gdp per c apita89Western Offshoots7Western 000y earFigure: The evolution of average GDP per capita in Western O shoots, WesternEurope, Latin America, Asia and Africa, 1000-2000.Acemoglu (MIT)Why Nations FailNovember 7, 2010.3 / 41

IntroductionThe Beginning— EnglandGlorious Revolution of 1688— absolutism of James II defeated.Following on the tails of major— successful or unsuccessful— reformsgoing back centuries: Magna Carta of 1215; political centralization andkernels of the modern state; the English Civil War.Declaration of Rights of February 1689: Parliament to meet regularlyand to act as a real constraint on the power of the monarchy.In addition, Parliament itself consisting of di erent factions, so anotherlayer of balance of power ! origins of pluralismThe power to levy taxes and set spending transferred to Parliament.Military power de facto stripped from the crown; raising a standingarmy requires consent of Parliament, which also controls spending forwar.Act of Settlement of 1701 introducing judicial independence.Strengthening of the notion of rule of law— central for thepersistence of these institutions.Acemoglu (MIT)Why Nations FailNovember 7, 2010.4 / 41

IntroductionThe Beginning— United StatesColonization attempts of Virginia Company in Jamestown in early17th century, attempting to re-create an authoritarian, “extractive”regime:“No man or woman shall run away from the colony to theIndians, upon pain of death.Anyone who robs a garden, public or private, or a vineyard, orwho steals ears of corn shall be punished with death.No member of the colony will sell or give any commodity ofthis country to a captain, mariner, master or sailor to transportout of the colony, for his own private uses, upon pain of death.”[from the laws passed by Sir Thomas Gates and Sir ThomasDale].But the Company was unsuccessful— it could not force the Britishsettlers into gang labor and low wages.Acemoglu (MIT)Why Nations FailNovember 7, 2010.5 / 41

IntroductionThe Beginning— United States (continued)The Company switch to the ‘headright system’giving all settlers 50acres of land and then shortly thereafter also political rights, in theform of it General Assembly.Similar events unfolded in Chesapeake Bay, Maryland and Carolina.The chain of events that ultimately leading to the Declaration ofIndependence and the U.S. Constitution.Acemoglu (MIT)Why Nations FailNovember 7, 2010.6 / 41

IntroductionThe Beginning— Latin AmericaJuan Díaz de Solís colonizes Río de la Plata in 1516, ‘River of Silver’and Pedro de Mendoza founds Buenos Aires in 1534.But Solís and de Mendoza unable to enslave and put to work thehunter gatherer Indians of the area, Charrúas and the Querandí.Starving Spaniards soon left the area.In 1537, Juan de Ayolas nd the sedentary and more densely settledGuaraní up the Paraná river, in Paraguay. The Spaniards cansuccessfully take over the Guaraní hierarchy, enslave them and putthem to work to produce food for them.A very similar pattern to the colonization of the Aztecs and the Incas.Acemoglu (MIT)Why Nations FailNovember 7, 2010.7 / 41

IntroductionMaking Sense of the DivergenceWhile both culture (religion, attitudes, values) and geography(climate, topography, disease environments etc.) are important forthe ability of humans to form well functioning societies, they areneither the “main” source of this divergence.Much of Latin America likely richer than North America as late asmid-18th century.Divergence due to the ability of the United States, just like Britain, totake advantage of new economic opportunities.Instead, our emphasis will be on “institutions” broadly de ned,historical roots of institutional di erences and the logic of institutionsthat do not unleash growth.“Institutions are the rules of the game in a society or, moreformally, are the humanly devised constraints that shape humaninteraction.” (North)Acemoglu (MIT)Why Nations FailNovember 7, 2010.8 / 41

IntroductionMaking Sense of the Divergence (continued)Yet another alternative perspective is that policies matter butpolicymakers are “ignorant” and don’t know what’s good for growthalso lacking.But unable to explain the logic of social arrangements leading torelative poverty— Cortes, Pizarro and Ayolas did not set up forced laborand repressive regimes because they were “ignorant” about theirimplications.Acemoglu (MIT)Why Nations FailNovember 7, 2010.9 / 41

Main ConceptsTowards a Theory of InstitutionsExtractive economic institutions: Lack of law and order. Insecureproperty rights; entry barriers and regulations preventing functioningof markets and creating a nonlevel playing eld.Extractive political institutions— in the limit “absolutism”:Political institutions concentrating power in the hands of a few,without constraints, checks and balances or “rule of law”.Inclusive economic institutions: Secure property rights, law andorder, markets and state support (public services and regulation) formarkets; open to relatively free entry of new businesses; upholdcontracts; access to education and opportunity for the great majorityof citizens.Inclusive political institutions: Political institutions allowing broadparticipation— pluralism— and placing constraints and checks onpoliticians; rule of law (closely related to pluralism).But also some degree of political centralization for the states to be ableto e ectively enforce law and order.Acemoglu (MIT)Why Nations FailNovember 7, 2010.10 / 41

Main ConceptsGrowth under Inclusive InstitutionsInclusive economic and political institutions (or inclusive institutionsfor short) create powerful forces towards economic growth by:encouraging investment (because of well-enforced property rights)harnessing the power of markets (better allocation of resources, entryof more e cient rms, ability to nance for starting businesses etc.)generating broad-based participation (education, again free entry, andbroad-based property rights).Key aspect of growth under inclusive institutions: investment in newtechnology and creative destruction.Central question: why are extractive institutions so prevalentthroughout history and even today?Acemoglu (MIT)Why Nations FailNovember 7, 2010.11 / 41

Main ConceptsThe Logic of Extractive InstitutionsOur main thesis is that growth is much more likely under inclusiveinstitutions than extractive institutions.Growth, and inclusive institutions that will support it, will create bothwinners and losers. Thus there is a logic supporting extractiveinstitutions and stagnation:those who maintain power and will lose out from major changes ininstitutions or economic growth will resist and block economicprogress— fear of creative destructioneconomic losers: those who will lose their incomes, for example theirmonopolies, because of changes in institutions or introduction of newtechnologiespolitical losers: those who will lose their politically privileged position,their unconstrained monopoly of power, because of growth and itssupporting institutions.we will argue that both are important in practice, but particularlypolitical losers are a major barrier against the emergence of inclusiveinstitutions and economic growth.Acemoglu (MIT)Why Nations FailNovember 7, 2010.12 / 41

Main ConceptsGrowth under Extractive Political InstitutionsThough growth is much more likely under inclusive institutions, it isstill possible under extractive institutions.Why? ! Generate output and resources to extract.Two types of growth under extractive political institutions:12extractive economic institutions allocating resources to highproductivity activities controlled by the elites (e.g., Barbados, SovietUnion)when relatively secure in their position, the elites may wish to allow theemergence of relatively inclusive economic institutions under theircontrol (e.g., South Korea under General Park, China today).But big di erence from growth under inclusive institutions: nocreative destruction and dynamics very di erent. Consequently, eventhough growth is possible under extractive institutions, this will notbe sustained growth.Acemoglu (MIT)Why Nations FailNovember 7, 2010.13 / 41

Main ConceptsIs Growth under Extractive Political Institutions AlwaysPossible?Di erence between extractive political institutions with and withoutpolitical centralization.Comparison of China vs. sub-Saharan Africa today.roots of political centralization also historical and subject to similardynamics and logic as to the roots of pluralism.Acemoglu (MIT)Why Nations FailNovember 7, 2010.14 / 41

Institutional ChangeTowards a Theory of Institutional ChangeCon‡ict pervasive in society.Leading to di erential institutional drift ! small but notabledi erences in institutions across nationsSmall di erences that matter.Major change happens assmall institutional di erences big shocks ! big institutional di erencBig shockscritical junctures for society leading to potentialdivergence.But outcomes during these critical junctures not historicallydetermined, partly contingent ( stochastic).Naturally, the changes that happen as a result of this interaction thenbecome the background small or not so small institutional di erencesupon which new critical junctures act.Acemoglu (MIT)Why Nations FailNovember 7, 2010.15 / 41

Institutional ChangeTransition to Inclusive InstitutionsExtractive institutions have been the norm in world history.Where do inclusive institutions come from?Earlier moves towards inclusive institutions resulting from con‡ict andinstitutional drift— Roman Republic, Venice, but ultimately reversed.Crucial turning point ! the Glorious Revolution in 1688.The Glorious Revolution brought much more inclusive, pluralisticpolitical institutions which then led to a transition towards much moreinclusive economic institutions.This created the conditions which led to the Industrial Revolution.Growth in the 19th century and dissemination of industry wereconditioned by interactions between initial institutional di erencesand the critical junctures created by political events and the IndustrialRevolution itself.Acemoglu (MIT)Why Nations FailNovember 7, 2010.16 / 41

Institutional ChangeThe Emergence of Inclusive Institutions in BritainDriven by interaction of initial institutions and critical junctures:Initial institutional drift: Britain was the bene ciary of a long historyof gradual institutional change from the Magna Carta of 1215 onwards,through the creation of a monopoly of violence by Henry VII after1485, nascent state under Henry VIII, Civil War of the 1640s.Critical juncture: Development of the Atlantic economy after 1492led to the emergence of a broad and powerful coalition in society infavor of reforming political institutions and removing absolutism.Owing to the context created by the initial institutional drift, thiscoalition triumphed in 1688.Acemoglu (MIT)Why Nations FailNovember 7, 2010.17 / 41

Institutional ChangeThe World in 1688: Small Di erences That MatterThere were important institutional di erences in the world in 1688which emerged historically— again institutional drift.Compare Europe and Africa: There were some centralized states inparts of Africa in 1688— Kongo, Kuba and Loango in the Congobasin, Asante, Bornu and Oyo in West Africa— but these wereinstitutionally much less complex and less centralized than Europeanstates and far less pluralistic.These states were also the exception rather than the rule.Acemoglu (MIT)Why Nations FailNovember 7, 2010.18 / 41

Institutional ChangeInstitutional Divergence at Critical Junctures: Black Deathand FeudalismThe divergence of Western and Eastern Europe after the BlackDeath— in the West the power of landlords declines and feudalismwithers away, in the East the power of landlords intensi es leading tothe Second Serfdom in the 16th century.This institutional divergence driven by a large demographic shockinteracting with initial institutional di erences (organization ofpeasant communities, distribution of landholdings).Acemoglu (MIT)Why Nations FailNovember 7, 2010.19 / 41

Institutional ChangeMeanwhile in MexicoThe e ects of lower population very di erent when there is coercion.Another instance of institutional divergence.0Population5000001000000.06.08 .1 .12.14.16Real Wage (in fanegas of maize)1500000Population and Average Real Daily Wages for Unskilled Repartimiento (LaborDraft) Workers1500155016001650YearPopulationReal Wages for Repartimiento WorkersAcemoglu (MIT)WhySource: Own Calculations based on Borah and Cook (1958)andNationsGibson (1964).FailNovember 7, 2010.20 / 41

Institutional ChangeMeanwhile in Mexico (continued)0Population5000001000000.02 .04 .06 .08 .1Real Wage (in fanegas of maize)1500000Population and Average Real Daily Wages for Unskilled Textile Obraje Workers1500155016001650YearPopulationReal Wages in Textile ObrajesSource: Own Calculations based on Borah and Cook (1958), Gibson (1964) and Viqueira and Urquiola (1990)Acemoglu (MIT)Why Nations FailNovember 7, 2010.21 / 41

Institutional ChangeInstitutional Divergence at Critical Junctures: AtlanticTradeThe economic divergence of the Netherlands and Britain from the restof Western Europe in the Early Modern period.Institutional divergence as a consequence of the discovery of theAmericas caused by how di erences in initial institutions (power ofabsolutism) led to di erent ways of organizing trade (how open)which in turn drove pressure for further change in politicalinstitutions. Britain become less absolutist, Spain more.Acemoglu (MIT)Why Nations FailNovember 7, 2010.22 / 41

Institutional ChangeInstitutional Divergence at Critical Junctures: North vs.South AmericaInstitutional divergence at independence.U.S. Constitution vs. the Mexican Constitution.In one case, insurgence and rebellion against authority, and aconstitution protecting a broad cross-section of society.In the other case, insurgence and rebellion against the CadizConstitution by the Mexican elite in order to stave o any threats totheir dominance.Acemoglu (MIT)Why Nations FailNovember 7, 2010.23 / 41

Institutional ChangeRevisiting Early Latin American ExperienceEarly Latin American institutions example of extractive economic andpolitical institutions.But by the logic of these extractive institutions, early on productivityin Latin America and the Caribbean is high, though unequal it iscommitted.The break comes with another critical juncture: IndustrialRevolutionDi erent responses in the North and the South.Why? New opportunities, particularly conducive to fear of creativedestruction.In the United States and Britain, industrialization spearheaded by newindividuals and groups— not the existing elites. This type of datadestruction di cult or impossible under extractive political institutions.The Latin American response to the Industrial Revolution not sodi erent from those of other extract of political institutions, such asAustria-Hungary or Russia.Acemoglu (MIT)Why Nations FailNovember 7, 2010.24 / 41

PersistenceWhy Is Latin America Still Poor?Vicious circlesExtractive political institutions lead to the establishment of extractiveeconomic institutionsExtractive economic institutions lead to inequality, making the elitemore able to control monopoly of political powerExtractive economic institutions increase the gain in terms of wealthand power from controlling the state, thus encouraging the elites toremain in power or others to ght to come to powerExtractive political institutions mean that those who come to powercan also act in an unconstrained manner.Iron law of oligarchy: emergence of new oligarchies after “regimechanges”.Acemoglu (MIT)Why Nations FailNovember 7, 2010.25 / 41

PersistenceFeedback Loops in Latin AmericaPersistence of elites: Guatemala.Instability: Caribbean, Mexico.Recreation of new elites: Mexico, Argentina.Acemoglu (MIT)Why Nations FailNovember 7, 2010.26 / 41

PersistenceIn Chile?Acemoglu (MIT)Why Nations FailNovember 7, 2010.27 / 41

Why Nations Fail TodayWhy Nations Fail TodayExtractive institutions: still the main cause of economic problems.In many societies persisting because of the vicious circleIn particular, insecure property rights and oligarchies dominatingeconomies are still commonplaceSometimes in the form of domination of traditional elites, sometimesunder communist dictatorships, sometimes under corrupt politicians,sometimes under populist regimes without any checks.Total failures of statesCivil war and total state failure a major factor in economic problemsaround the world today, particularly in sub-Saharan Africa.Also consequence of a history of extractive institutions.Often, a cycle of moves between extractive institutions under asemi-authoritarian regime and civil war.Acemoglu (MIT)Why Nations FailNovember 7, 2010.28 / 41

Why Nations Fail TodayHow One Makes MoneyAcemoglu (MIT)Why Nations FailNovember 7, 2010.29 / 41

Why Nations Fail TodayLegacy of Colonial Times (continued)Regression discontinuity e ects of Mita from Dell (2008).5log equiv. consumption67A. Equivalent Consumption (2001)-100-50050100Di s ta n c e to m i ta b o u n d a ry (k m )Acemoglu (MIT)Why Nations FailNovember 7, 2010.30 / 41

6 Obs.13 S 38 Obs. 70 Obs. 13.5 S 14 S 102 Obs. 15 S14.5 S 15.5 S 16 S 74 W73 W72 W71 W 5.506.206.907.608.30 9.00

The Path ForwardTowards Institutional ReformMajor pitfalls on the road.The iron law of oligarchy.Total and persistent lack of political centralization.De jure but not de facto reform.The seesaw e ect.The new (populist) despotism.Acemoglu (MIT)Why Nations FailNovember 7, 2010.31 / 41

The Path ForwardPersistence of ElitesAcemoglu (MIT)Why Nations FailNovember 7, 2010.32 / 41

Presidents of Central America descended from the Conquistador Cristóbal de AlfaroPRESIDENTS IN ALFARO FAMILY TREE13122344GuatemalaLaugerud García, Kjell EugenioSalvadorBarrios Espinoza, GerardoGuzmán Ugalde, JoaquínHondurasBonilla Vázquez, Policarpo56758910121113 14 323334353637383940414244 45 s, BelisarioNicaraguaCarazo Aranda, EvaristoSacasa Sacasa, Juan BautistaSacasa Sarria, RobertoSolórzano Gutiérrez, CarlosSomoza Debayle, AnastasioSomoza Debayle, LuisSomoza García, AnastasioCosta RicaAcosta García, JulioAlfaro Zamora, José MaríaAguilar Barquero, FranciscoAguilar Chacón, ManuelArias Sánchez, OscarCalderón Guardia, Rafael AngelCarazo Odio, RodrigoCarranza Ramírez, BrunoCarrillo Colina, BraulioCastro Madriz, José MaríaCortés Castro, LeónEchandi Jiménez, MarioEsquivel Ibarra, AscenciónEsquivel, Sáenz, AnicetoFernández Chacón, ManuelFernández Oreamuno, PrósperoGallegos Alvarado, José RafaelGonzález Flores, AlfredoGonzález Víquez,CletoGuardia Gutiérrez, TomásHerrera Zeledón, VicenteJiménez Oreamuno, RicardoJiménez Zamora, JesúsMonge Alvarez, Luis AlbertoMontealegre Fernández, José M.Mora Fernández, JuanMora Porras, Juan RafaelOduber Quirós, DanielOreamuno Bonilla, FranciscoOrlich Bolmarcich, Francisco J.Picado Michalski, TeodoroRodríguez Zeledón, JoséSoto Alfaro, BernardoTinoco Granados, FedericoTrejos Fernández, José J.Ulate Blanco, OtilioYglesias Llorente, DemetrioYglesiasCastro, RafaelSource: Samuel Stone (1990) The heritage of the conquistadors: ruling classes in CentralAmerica from the Conquest to the Sandinistas, Lincoln: University of Nebraska Press, p. 153.

The Path ForwardThe Iron Law of OligarchyAcemoglu (MIT)Why Nations FailNovember 7, 2010.33 / 41

The Path ForwardThe Iron Law of Oligarchy (continued)Acemoglu (MIT)Why Nations FailNovember 7, 2010.34 / 41

The Path ForwardThe State?Acemoglu (MIT)Why Nations FailNovember 7, 2010.35 / 41

The Path ForwardDoes a Reform Mean Anything?Acemoglu (MIT)Why Nations FailNovember 7, 2010.36 / 41

Figure 2The See-Saw Effect0Annual Inflation Rate.1.2.3.4.15.2.25.3.35Government Expenditure as % of GDPCOLOMBIA196019701980199020002010YearAnnual Inflation RateGovernment Expenditure as % of GDP0Annual Inflation Rate102030.15.2.25.3.35.4Government Expenditure as % of GDPARGENTINA196019701980199020002010YearAnnual Inflation RateGovernment Expenditure as % of GDPNote: Annual Inflation Rate (scale on the left vertical axis) corresponds to the annual variation in the consumer price index reported in theInternational Financial Statistics (IMF). Government expenditure data (scale on the right vertical axis) are from World Economic Outlook(IMF). Vertical line shows the year of major Central Bank reform taken from Jácome and Vasquez (2005).

The Path ForwardThe New Despotism?This is not an illogical movement. How to balance it?Acemoglu (MIT)Why Nations FailNovember 7, 2010.37 / 41

The Path ForwardGrowth under Extractive Institutions Version 2.0?New calls for authoritarian growth under the banner of “Beijingconsensus”.No longer sustainable given the extent of political con‡ict in much ofLatin America.Not that much room for growth under extractive institutions giventhe income levels in countries such as Chile, Argentina or Brazil.Acemoglu (MIT)Why Nations FailNovember 7, 2010.38 / 41

The Path ForwardHow to Move Forward?Beyond resource-based and catch-up growth.Innovation and growth based on creative destruction will be key.These cannot be achieved under extractive institutions are weakinclusive institutions.Secure property rights, level playing eld and broad-based participationin the economy will be key.But these in turn have to rely on pluralism in the political arenaMany parts of Latin America, including Chile, are taking strong stepstowards pluralism the road is a bumpy one.Acemoglu (MIT)Why Nations FailNovember 7, 2010.39 / 41

The Path ForwardThe Rise of Pluralism?Acemoglu (MIT)Why Nations FailNovember 7, 2010.40 / 41

The Path ForwardThe Rise of Pluralism? (continued)Acemoglu (MIT)Why Nations FailNovember 7, 2010.41 / 41

Acemoglu (MIT) Why Nations Fail November 7, 2010. 17 / 41. Institutional Change The World in 1688: Small Di erences That Matter There were important institutional di erences in the world in 16