it's the institutions, duh

like, duh ( ͡ᵔ ͜ʖ ͡ᵔ )

At the beginning of the year, I started a habit of reading a book every month and writing about what I read at the end of the month. Last year I began a similar commitment. The book for January was ‘Why Nations Fail’ by Daron Acemoglu and James Robinson. I didn’t finish, I didn’t even read any book last year :/

2020 is different, my habits are stronger and I am following through betterly. So in January of 2020, I read that same book I couldn’t finish and it was great. Here is what I learned:

institutions mehn

The difference between the rich and poor countries we have today is mostly a difference in their institutions. The economic institutions of a society determine the economic incentives the people have, e.g the will to get a job, the will to be educated.The political process plays a major role in determining the economic institutions a society adopts. Politics in society is who has power and how that power is used. The group that holds political power in society will order the economics in a way that benefits them. There are two types of institutions, extractive and inclusive institutions. Nations fail because they have extractive economic and political institutions. Extractive institutions exploit the economic potential of citizens to enrich a narrow few. Inclusive political institutions have some qualities:

  • Pluralist participation: This means that power is widely distributed among the population and between diverse groups of society. This ensures that no one group has an absolute hold on the running of society because power is shared among diverse interests. Most citizens have a say in the governing of society.

  • Unbiased system of law: Everyone in a society is subject to the same laws. Therefore those in charge would have less reason to create laws that are harmful to others because these laws will also affect them.

  • Sufficiently centralized state: The state is the entity that has a “monopoly on legitimate violence” according to Max Weber. It is this central authority that runs things in a country, they are the sole administrators of government and no segment of society is out of the control of the state. In an inclusive political institution, it is the state that enforces law and order, provides public services, secures property rights, and encourages and regulates economic activity.

Inclusive political institutions work hand-in-hand with inclusive economic institutions. An inclusive economic institution has the following qualities:

  • Secure property rights: Citizens should make economic investments without fear that those assets will be expropriated. If property rights are not secure people will not invest o tan.

  • Free markets: Markets need to be free so people can exchange value and create wealth.

  • Public services that create “a level playing field were people can make transactions and form contracts”

  • It must allow the entry of new businesses: This will foster competition and creative destruction, therefore, preventing one company from growing too big.

  • People must have the right to choose their careers: The best way, according to the book, to allocate resources and talents (labor) in society is through markets. People should choose their occupations based on what the market wants: the demand, supply, and price of their skills. This will create the right incentives for labor to be used efficiently and will determine the kind of skills people want to acquire through education. If labor was organized solely by a narrow elite, the resources and talents of people will be wasted or at best underutilized.

institutional differences

Most countries that are poor are those with extractive institutions: they lack a sufficiently centralized state, the rule of law is not practiced, there are no free markets and new technologies are resisted. But these institutional differences didn’t just happen, they are not ‘natural’. They are as a result of the interplay between small institutional differences and critical junctures.

A critical juncture is an event or a culmination of events that disrupt the economic and political structures of a society. How a country responds to these critical junctures determines the path their institutions take. They either move towards more inclusive or more extractive institutions so it is very crucial that a society takes advantage of such major events. For example, in the 1300s, countries in Western and Eastern Europe both had similar extractive institutions. They were ruled by a ruling class that sucked the blood of the masses. England had an absolutist monarchies, Lords and Serfdom (the poor people that worked the lands for the Lords). But after the critical juncture caused by the Black Death, their paths began to diverge. The serfs that survived the black death in England and much of Western Europe gained more power and organized to demand more rights, weakening the absolutist regime. But in Eastern Europe, the Landowners intensified their extractive policies collecting higher taxes and thus strengthening the already extractive institutions. The reason Western Europe responded differently to the Black Death was because of small differences in their institutions and small small historical divergences.

The Black Death was long ago and though its effects are still felt it isn’t responsible for the huge disparity in fortunes in the world today. This disparity is a result of the Industrial Revolution. Countries that did not take advantage of the new technologies and new market opportunities created by the Industrial Revolution are those that are poor today. This is because of the interaction of institutional differences and the critical juncture of the Industrial Revolution.

The Industrial Revolution happened in England because of her uniquely inclusive economic institutions that allowed creative destruction and expansion of businesses. These inclusive institutions were built on the foundation laid by her inclusive political institutions brought about by previous critical junctures. English society was open to different groups of society and it was receptive to the economic needs and aspirations of the people. These groups did not block the entry of new technologies but instead embraced them to create new wealth. Africa did not :/

Creative destruction is the effect of a change in society that leads to old systems being replaced by new systems. For example, the adoption of factory technology in the 1700s saw new factories open and replace old factories that did not use mechanized techniques. Creative Destruction leads to winners and losers. Potential losers of an innovation obviously wouldn’t want that change.

When the wave of industrialization was sweeping the world from the British Isles some countries, because of their already inclusive institutions, partook in it. While some did not or actively opposed it. America and Australia could industrialize and grow rapidly because their institutions did not block new technologies, innovation or creative destruction. Many African societies at the time of the Industrial Revolution refused to adopt the new technologies that would have enhanced their productivity. An already absolutist society is not receptive to new technologies because they are afraid it will diminish their power. In the case of the Kingdom of Taqali in Somalia for example, the citizens had no incentive to use the writing system because they feared that the absolutist elite would use it to enforce more taxes. Even the rulers didn’t adopt the system because they feared what would happen to their hold on society if they did. Even if they wanted the people to use advanced technology they didn’t have enough control over them to make them (lack of centralized state).

institutions use to tey sha - persisting institutions

So does it mean that countries that have extractive institutions today are screwed? Yes… but no. Institutions can change over time or abruptly or not at all. When a country is set on one institutional path, this tends to persist. This is caused by either the virtuous or vicious circle. Inclusive economic and political institutions tend to persist because they support each other. The leaders that hold on the power in an inclusive system will give in to the demands of the people for greater participation in politics because holding on to power becomes less attractive for them. The move towards more inclusive institutions is easier when each step is small. These small small improvements in inclusivity reduce the attractiveness of holding on to power. In these cases, the ruling class makes small concessions in favor of those demanding more inclusive institutions.

why inclusive institutions may persist

An inclusive economic institution will make a country more inclusive politically because as wealth is distributed you also distribute power and as more and more groups have power, they demand greater participation in the governing of the country. This is a way for inclusive institutions to persist. That is why we need more people to blow in other industries in Nigeria because if everyone is an oil baron then it is only oil baron interests that will be represented, but if there was a broad mix of political interests, backed by their respective economic interests, political power will be shared.

Inclusive institutions allow the media to be independent and free. This ensures that threats to a society’s inclusiveness will be exposed and widely reported so everyone knows about it, then people resist these threats inducing politicians to take action. If people in a society recognize a threat to their freedoms and the inclusive nature of the country they will fight it. Groups with power need to be monitored by a free media so if they step out of line, we riot (ノ ಠ 益 ಠ)ノ彡 ┻━┻

Inclusive institutions persist also because of the rule of law. The rule of law says that all laws should apply to everyone, this then means that the laws being created are ones that benefit… everyone! The rule of law implies that laws cannot be used by one group to deny the rights of others or to make the other groups suffer. If every politician was subject to all the laws like us, stealing money will be less attractive because they know they too will suffer the penalties. Also when they make laws they will make laws that benefit everyone including themselves because this ting go still touch them. This can only work in a pluralist society where different segments of society each have a say in how things dey go. Everyone has a seat at the table. No one group will be amassing power to oppress the others and the other groups will now be looking. (° ロ °)☝

extractive institutions also tend to persist

Extractive economic and political institutions feed from each other. Extractive political institutions lead to extractive economic institutions. Because the ruling class is unopposed and they have control over the economy. Those who benefit from the economic institutions then use this their ill-gotten resources to strengthen their position in society by building up armies, bribing judges or rigging elections. This is clear in Nigeria. The vicious circle is apparent.

Extractive institutions persist because those that benefit from them also persist. The elite ruling class in Nigeria have more or less remained the same since the civil war, it is in their best interest to preserve the existing extractive economic and political structures. So they oppose any threats to the status quo.

The regime that overthrows an extractive one also takes over the extractive institutions because when they came on the scene there were no constraints on their power even though they had good intentions. As in the case of those who fought for independence in Sierra Leone. They promised to put an end to the exploitation of the British but when they show ground they even intensified the exploitation. Chai. We can even see this in Nigeria too, #Change. But revolutions don’t always reproduce the same kind of leaders. In England, they had a Glorious revolution of 1688 that led to more inclusiveness. The difference was this push for change was led by an empowered broad coalition that put constraints on each other’s power so no one went out of line, and not by a small group seeking power.

Another way extractive institutions persist is when there is not enough political centralization and different groups contest for the control of the attractive extractive institutions leading to continuous infighting and civil conflict. This is a common theme in post independence sub-Saharan African countries.

so, yeah

Inclusive political institutions work because political power is distributed among different groups and there are constraints on how their power is exercised. Without this, omo you are jonzing.

Countries can be analyzed based on the type of institutions they possess, from now one I would just look at the characteristics of the country and compare them with characteristics of inclusive or extractive institutions. Understanding the institutional layout of a country helps us come up with better solutions to increase wellbeing and prosperity. Most times we think that by attacking the symptoms of extractive institutions, rather than the institutions themselves, we would ‘solve’ Nigeria’s problems. But many of our problems such as poor education, corruption, low productivity are the effects and not causes of extractive political and economic institutions that don’t give people enough incentives to adopt new technologies or to not give bribes.

Get the book on Konga.


See other posts