I was not alone with high hopes when the Soviet Union collapsed. It has been good to see various nations leave the yoke of the Soviet Empire and move towards liberal democracies with thriving economies although sometimes it has been two steps forward and one back. But that has not happened to Russia itself, despite it having a comparatively well-educated population and a large economy. It remains nowhere near a liberal democracy and any economic success has been correlated with high oil and gas prices.
Among others who were disappointed was a British economist and political scientist, James Robinson, currently at the University of Chicago. He has just been awarded a Nobel laureateship in economics jointly with Turkish economist Daron Acemoglu and British economist Simon Johnson of MIT. With Ronald Coase, Douglass North, Elinor Ostrom, and Oliver Williamson – also Nobel Laureates – they have been key contributors to the ‘new institutionalism’, which focuses on the contribution of institutions (the social and legal norms and rules) that underlie economic activity.
The approach is well illustrated by the 2018 Why Nations Fail by Acemoglu and Robinson. Like all their books, it is rich in ideas. I focus here on the light it sheds on the Russian experience.
What I underestimated at the time of the Soviet collapse was the importance of institutions such as the rule of law, restraint on arbitrary government, lack of corruption, secure human rights, sound property rights and sustainable fiscal practices (including a robust tax system). They are so integral to many of the economies I have studied closely that I overlooked their importance.
The Soviet empire generally lacked them. Even today, the ‘liberated’ nations to its west struggle, some lapsing into authoritarianism (currently Hungary) and finding it difficult to eliminate corruption (Ukraine is not alone in this respect).
Perhaps it is not so surprising. It took the prosperous Western economies centuries to evolve their current institutional arrangements and they are still not always perfect. What is sad though, is that Russia has made so little progress compared to the years when it dominated the Soviet Union.
The Russian economy is distinguished from the ex-Soviet economies to its west by being based upon enormous mineral reserves – especially oil and gas. The success of these quarry industries crowds out more conventional exportable industries, such as farming and manufacturing (as explained by the ‘Gregory effect/Dutch disease’). Resource-based industries produce substantial rents and there is more private profit to be made from wrestling over the allocation of those rents than by producing things, especially when the members of an authoritarian government are syphoning off some for their private enrichment. The book describes the resulting political economy as ‘extractive’.
Contrast with New Zealand. Admittedly we inherited our institutions from the long-evolving British ones. (Acemoglu and Robinson see their foundation in the 1688 Bill of Rights.) But we are a resource-based economy too. Our resources – sun and water (New Zealand soils are not particularly fertile) – are not as easily monopolised as those found down a well with their associated pipelines. Instead, the rise of the mixed family farm, following the introduction of refrigeration in 1882, dispersed the resource rents across much of the population, shaping the political economy of New Zealand into a popular liberal state with a market economy, which the book describes as ‘inclusive’.
There was almost an important exception. Initially, prosperous sheep farms were not viable north of Taupo because of bush sickness and footrot. Instead, late nineteenth-century Auckland developed around the extractive industries of gold, kauri gum and kauri timber. Fortunately for Auckland, as they became depleted, the railway network facilitated dairy farming in the Waikato region while, as its port became increasingly dominant, local manufacturing prospered. Even so, today a residual of those ‘wild west’ times is still evident in the more commercially vigorous Auckland. (This story is elaborated in Chapters 13, 16 and 18 of Not in Narrow Seas.)
Acemoglu and Robinson argue that inclusive political and economic institutions lead to a prosperous economy, while where the institutions are ‘extractive’ there is poverty and economic failure. A key difference is that the former allows initiative and innovation, whereas the latter stifles it.
But is an inclusive political economy necessary for economic prosperity? Acemoglu admits that China appears to be an exception suggesting its economic success may be but transitory. In my view China’s success has been the result of technology transfer from the West and the economy may not be sufficiently innovative to sustain its growth.
We must be careful though with this explanation. Concentrated effort enabled the Soviet Union to develop nuclear weapons and the sputnik. But it was not generally pervasive. Clearly China’s development of electrical vehicles is impressive, but widespread innovation has been less evident. I await to learn more of the new institutionalists’ explanation for the China anomaly. A major component of its current economic struggle has been a bursting of a Ponzi-type property boom (although one might argue that the finance boom in the West is similarly artificially stimulative). Certainly, China’s government has not shown the degree of arbitrariness and corruption evident in Russia – not as yet.
Both China and Russia show considerable outmigration. The success of those migrants rules out that their countries face some cultural or racial handicap. The outflow of so many able, energetic well-educated Russians to the West adds to my pessimism about its future. Instead of the prosperous inclusive society which one hoped for after the collapse of the Soviet Union, it is likely to remain exclusive and extractive, even after Putin, with its elite fighting over the resource rents. That is disturbing because of the destabilising impact on the world order. That is sad because I so much admire Russian contributions in art, literature, mathematics, music, science and – yes – even economics. Too often though, recently these have been by its refugees in the West.
Why Nations Fail and the other works the three have published are worthy of Nobel recognition. The New Institutionalism reminds us that economics is not just about narrow technical markets but about the wider social context in which an economy operates. Adam Smith, David Ricardo, Karl Marx, Maynard Keynes and Joseph Schumpeter – among so many of our great economists – would applaud.
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
40 Comments
It's ironic that the economic wellbeing of Western nations seems to put a significant emphasis on being able to tap into Chinese demand for exports and the transfer of talent and wealth generated within China to Western nations. If we're so superior, then why are we reliant on China? Not just to sell our goods to, but also their ability to make cheap widgets. Without China, those widgets can't be produced. We have no answer or solution.
I'm not so sure that the West is the pinnacle based on the idea that our institutions are more sound. If it were true, then the idea of the 'deep state' should be palatable. But it's not and appears to be a core issue in the current elections in the US.
Yep. It's all a very limited political and economic thinking. We're right, you're wrong type of thinking.
It's a form of projection and imposing ones "values" on another. The "West" can't admit that they've just inherited a set of beliefs, can't look at their own culture, and address their own issues first. The West's institutions of social norms and legal rules aren't anything to brag about or hold up to any level of greatness. The rule of law is really the law of rule. It's still the power of the few over the many.
It's literally pot kettle and throwing stones in glasshouses.
"You hypocrite, first take the plank out of your own eye, then you will see clearly to remove the speck from your brother's eye."
The "West" can't admit that they've just inherited a set of beliefs, can't look at their own culture, and address their own issues first. The West's institutions of social norms and legal rules aren't anything to brag about or hold up to any level of greatness.
You pretty much nailed it here. The way I see it, the West is suffering from its own 'superiority complex.'
I think it's part of the human conditioning borne thousands of years ago.
I think mankind developed an inferiority complex first. At some point realised their insignificance in the great cosmos and through that it has morphed into this "superiority complex".
Ancient wisdom teachings and practices, even the "myths" created by those indigenous to the land helped to overcome this. Unfortunately much of this knowledge has been lost in translation, and even the attempt to bring some of it back is being distorted by current programming.
It's fairly evident in our overall egotistical and narcissistic economics, politics, cult of personality. Our science in an attempt to understand everything around us has taken us away from understanding ourselves. It's almost as if we're still chained in Plato's cave, only there's a shit ton more shadows on the wall.
A series of comments condemning 'the West'. It is a simple fact that the west is best; it is the most successful. Which is supported by the 3rd world wanting to move to the 1st and not the reverse. Denmark is better than Paraguay, Australia better than Zaire, Canada better than Kenya, etc.
And why: for historical reasons, some related to technology or access to the oceans but mainly a rule of law that allowed capitalism to develop. A rule of law that enabled the founding of the great European empires during the same period as the laws permitted 80,000 European witches to be burned between 1500 and 1660. Who takes big risks if they cannot be assured of holding on to any rewards.
I've no objection to those wishing to live under more virtuous laws moving to other cultures. Bhutan sounds like a Shangri-La but not the place to start Rocket labs.
If we can't study our own culture and set of inherited beliefs and identify the ones that made us great then we will sink.
The First World got where it did, by scr--ing the Third World out of its resources.
Amd there ain't enough planet to go around, for the others to get aboard.
And the 'even less happening all the time' is the rug being pulled out from under the First World.
Eason needs to retire - he cannot 'get it'. Not that he's the only one guilty of that.
Summed up by Lord Curzon post WW1. “ We sailed to victory on a sea of oil.” Thus the world entered the age of oil. Russia is not short of oil and natural gas deposits but what seems to be overlooked, neither is Ukraine. In the eighties I had an associate who worked at “Oxy” Occidental Petroleum in London. One afternoon across the foyer I even happened to spot Mr Hammer himself entering the building. He had by then spent much dosh and effort cultivating influence to acquire rights or whatever in the Soviet Union and that included the then, so far uncounted resources of Ukraine. Mr Putin obviously seeks influence in an alternative manner.
so a net importer.
They all start out net exporters. Then they pump more. then they use more themselves. Then they start to reach peak pumping-rate. But the internal demand keeps on increasing. Exportable surplus diminishes; vanishes, turns negative. Petroleum Geologist Jeffery Brown coined the phrase: Export Land Model.
Falling back on Wiki here which explains that Ukraine has the third largest shale gas reserves in Europe at 128 trillion cubic feet. Started in on it in the 1950s but has never been exploited in earnest. The locations are relatively deep which means greater costs. Chevron & Shell were poised to get involved in the late 1980s (which likely relates to the activity of Occidental I mentioned) but pulled out because of the looming political upheavals in Russia. Guess it’s now a question of watch this fracking space.
Deserving winners? Really? What for, whitewashing the past? Let's pick out a few of the common critiques of this lots' work.
1. The success of the countries picked out by the authors was based initially on military might, slavery, protectionism,, rampant extraction (colonialism) and often significant corruption. The gilded age of the US for eg. The strong institutions revered by the authors came afterward.
2. The authors casually dismiss China as an anomaly - saying that they are just a failure waiting to happen. That was dubious at the first time of stating 14 years ago, now it is ridiculous.
3. The authors celebrate the success of colonised 'inclusive' countries like NZ, Aus, etc. But stand back a bit and look at those economies - raw materials and primary goods extracted at great environmental and human costs for colonial masters initially, and then global corporations owned by elites. And, when that wasn't enough to keep things going, private debt fueled housing ponzi schemes to generate returns for the top 1%.
At least we have strong institutions to keep the fruits of our labour and our natural resources flowing up though, ay?
As for the Karl Marx would approve comment. Don't get me started.
The authors celebrate the success of colonised 'inclusive' countries like NZ, Aus, etc.
Despite our relative insignificance in terms of sheer economic might, we're still shining examples and members of the monetary hegemony as swap nations. Because we're invested in the prevailing dogma that the Global South is expected to blindly accept.
And China, Russia, etc are still an classified as a 'non-market economy' outcasts.
What is our role in that club? To support the hegemonic power of the US? To go into debt so that our biggers and betters can extract our natural wealth?
Yes. I believe our role is to support that hegemonic power. And I think that whatever political persuasion or economic school of thought we individually prescribe to, we appear to drive the narrative through our institutions - central banks, IMF, WEF, etc. That includes educating and keeping in line the savages of the Global South.
As for the Karl Marx would approve comment. Don't get me started.
Haha I had a similar thought process. I'm actually impressed at the mention of him though. I think a lot of his work is still valid today and the whole communist fear is simply a means to prevent any of his ideas taking hold. Too much power would have to be given up by those in charge. I think Adam Smith would not be applauding and rolling in his grave at how we've distorted his works.
It just highlights to me that economists are too vested in their academic dogma. They're completely ignorant of any wider social context. All economic theory has been cherry picked and misinterpreted to suit the ruling class. Economics and monetary policy is an ongoing experiment with no real evidence or scientific background, and fails to adjust to reality. Don't get me started on Hayek, Friedman, the Mont Pelerin Society, and the Chicago school.
An interesting read about Keynes here though
In The Economic Consequences of the Peace in 1919, Keynes predicted that the crushing conditions the Versailles peace treaty placed on Germany to end World War I would lead to another European war.
He remembered the lessons from Versailles and from the Great Depression, when he led the British delegation at the 1944 Bretton Woods conference—which set down rules to ensure the stability of the international financial system and facilitated the rebuilding of nations devastated by World War II. Along with U.S. Treasury official Harry Dexter White, Keynes is considered the intellectual founding father of the International Monetary Fund and the World Bank, which were created at Bretton Woods
Maybe the IMF and World Bank should've been dismantled once their objective was completed.
https://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm#:~:text=K….
It's a really good book, provides a different perspective to some of the historical/geographical interpretations.
It's also why anyone who values freedom should be very wary of parties who erode those institutions. We can see what happens when things like the separation of powers gets undermined and the Republicans under Trump's influence move away from bi-partisan appointments and load the courts with their political lackeys.
Same with the current coalition, ignoring evidence based policy conventions and ruling based on 'feels', 'reckons', 'anti-woke shit-posting' and not even mildly camouflaged party donor's interests.
Once the institutions are corrupted it's very hard to come back.
Surveys indicate that over 90% of Chinese citizens believe that having a democratic system is beneficial. However, this support often does not translate into a desire for Western-style liberal democracy, which emphasizes competitive elections and political pluralism.
https://www.tandfonline.com/doi/full/10.1080/10670560701562283#d1e154
There’s a very good article in this week’s The Listener on this book and it’s relevance to NZ. Spoiler alert - while the author acknowledges some of the criticisms of the book, he makes the argument that some of the book’s key findings apply very well to little ole NZ.
Here’s an extract from The Listener article:
’Superficially, New Zealand does all the right things. Property rights, rule of law, democracy, open markets. We should be flourishing! And our rights and legal system are fairly robust. But we have a very concentrated political system dominated by two large, centrist parties, neither of which stand for very much. Our laws around lobbying and political donations are a joke and - lo and behold- monopolies and cartel-like behaviour are endemic across our economy’
And:
’Two of the signifiers of elite capture and extractive economics are low productivity and mass outward migration (of highly skilled people). There’s little point in bringing new products to market or building an export business if you can get rich via political influence…
This lack of innovation delivers a low-wage economy with high prices. So, if you’re young, qualified and entrepreneurial, your best bet is to go somewhere else with more inclusive institutions and better economic prospects’
article by the very clever and talented Danyl McClaughlan
Innovation and productivity alone don't guarantee wider beneficial results. How we use innovation and an environment that encourages a more balanced share of productivity gains at origin determines whether we have a low wage, non productive economy. And it would appear they've both just become buzzwords, being used in everyone's marketing narratives.
It's a chicken and egg scenario, which came first?
@ agnostium - agree with your first part of valuing freedoms, but you confused yourself with your second part.
It is not the Coalition who wish to remove your freedoms bit by bit, but the previous Labour government that had successfully done so, to which we voted out. Labour created the largest devide, separation & segregation in this countries history since war time.
Their great leader told us free speech was an act of terrisim, that a difference in opinion was hate speech, that a difference in ideology was a conspiracy theory. During their reign people died alone in the hospital, lost their jobs over mandates, lost their businesses, wearnt allowed to go to church, 2yo's were forced to mask. These same people in power told you you can't question the science, they used coercion to force an ideology, they told you they were the single source of truth - That if it didn't come directly from them it was mis information. And your worried about the Coalition taking away your freedoms? Lol
That's some woke shit of the pot calling the kettle black if ever I heard it. Don't bother screaming out conspiracy theorist political buzzwords that you've been trained to parrot just because I call out your wokeness either. You'll have to do a little better than that.
No I don't believe that the Coalition will be the answer to our countries problems. But I do know that they are undoubtedly a better solution than what we have had the last 6 years under Arderns administration. That then buy us time to figure out a more permanent solution to our governing, as both red or blue every three years has proven to be counterproductive. Neither have whay it takes to solve the countries issues. However, until then, the Coalition have not said anything remotely as extreme or threatening to one's personal freedoms compared to the Ardern Administration. The Coalition, though not the solution, is certainly a well deserved break from the constant tyanny attack on people's individual choices from the last Labour party.
If you are truely worried about ones personal freedoms, then you should actually breath a sigh of relief you have the Coalition, & not more of what we've had the last 6 years. If the majority of people actually believed we would be worse off under the Coalition compared to what we have just voted out, people would have gone out of their way to keep Labour in, just to keep the Coalition out, but this didn't happen. 75% of voters chose not to vote for Labour. It doesn't mean they voted for National, but it does speak volumes that a majority of the country were fed up with the constant power grab & freedom grabs of the Labour party. Not a single entity was left unangered by the time their time was up, from teachers, nurses, farmers, business owners, tenants, landlords, the lot. Be glad you have the Coalition, for the alternative was far worse. We said no to that.
Once an individual is corrupted with wokeness it's very hard to come back.
China has so many highly competitive small businesses and so many top level scientists and engineers that it is bound to thrive despite the overhead of its corruption. The use of subsidiaries in other countries (Vietnam, NZ, Singapore, UK, etc) will help them too. Note the similarities to NY in the late 19th century and Birmingham, Manchester, Glasgow of the early 19th Century - the dead weight of corruption overpowered by innumerable dynamic small businesses.
I would say that this government has crossed the Rubicon and entered the realm of pure corruption in several areas, tobacco, road transport, mining and development. You would expect it from the current Act and NZ First iterations but National are just to blame for being the enablers.
The problem with ARJ is that while they did bring interesting ideas to widespread recognition (marxists have been talking about them for ages) through use of modern statistical techniques of econometrics, the issue with their approach is how do you actually measure the inclusiveness or exclusiveness of institutions. They focus mostly on african colonial experience and honestly struggle to explain what happened in east asia, particularily since they hold up western ideas of liberal democracy as an indicator of inclusiveness. Even ignoring China; examples like South Korea, Taiwan, Hong Kong, Singapore all saw rapid growth under governments closer to dictatorships than liberal democracy. On the flipside India remains a major outlier, lagging behind despite having what should be more democratic system.
I don't understand why anyone would bring up outmigration as an indicator of institutional quality. There obvious confounding variable that is wages. Sure theres massive outmigration to China and Russia, but lets not forget how much outmigration there is from democratic India, and how little there is from Monarchist Gulf states. Even NZ is experiences significant outmigration to Aus and UK, and I'm pretty sure our democratic indicators are a tad better.
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