Cycles of Wealth and Poverty Theme Analysis

Politics is the process by which a society chooses the rules that will govern it. Politics surrounds institutions for the simple reason that while inclusive institutions may be good for the economic prosperity of a nation, some people or groups, such as the elite of the Communist Party of North Korea or the sugar planters of colonial Barbados, will be much better off by setting up institutions that are extractive. When there is conflict over institutions, what happens depends on which people or group wins out in the game of politics—who can get more support, obtain additional resources, and form more effective alliances. In short, who wins depends on the distribution of political power in society.

Opposition to economic growth has its own, unfortunately coherent, logic. Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete. The process of economic growth and the inclusive institutions upon which it is based create losers as well as winners in the political arena and in the economic marketplace. Fear of creative destruction is often at the root of the opposition to inclusive economic and political institutions.

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. […] Black Africans were indeed “trapped” in the traditional economy, in the Homelands. But this was not the problem of development that growth would make good. The Homelands were what enabled the development of the white economy.

The rule of law is not imaginable under absolutist political institutions. It is a creation of pluralist political institutions and of the broad coalitions that support such pluralism. It’s only when many individuals and groups have a say in decisions, and the political power to have a seat at the table, that the idea that they should all be treated fairly starts making sense. By the early eighteenth century, Britain was becoming sufficiently pluralistic, and the Whig elites would discover that, as enshrined in the notion of the rule of law, laws and institutions would constrain them, too.

The British example, an illustration of the virtuous circle of inclusive institutions, provides an example of a “gradual virtuous circle.” The political changes were unmistakably toward more inclusive political institutions and were the result of demands from empowered masses. But they were also gradual. Every decade another step, sometimes smaller, sometimes larger, was taken toward democracy. There was conflict over each step, and the outcome of each was contingent. But the virtuous circle created forces that reduced the stakes involved in clinging to power. […] There is great virtue in this sort of gradual change. It is less threatening to the elite than the wholesale overthrow of the system. Each step is small, and it makes sense to give in to a small demand rather than create a major showdown.

Sierra Leone’s development, or lack thereof, could be best understood as the outcome of the vicious circle. British colonial authorities built extractive institutions in the first place, and the postindependence African politicians were only too happy to take up the baton for themselves. The pattern was eerily similar all over sub-Saharan Africa. There were similar hopes for postindependence Ghana, Kenya, Zambia, and many other African countries. Yet in all these cases, extractive institutions were re-created in a pattern predicted by the vicious circle—only they became more vicious as time went by. In all these countries, for example, the British creation of marketing boards and indirect rule were sustained.

This form of the vicious circle, where extractive institutions persist because the elite controlling them and benefiting from them persists, is not its only form. […] In a form that the sociologist Robert Michels would recognize as the iron law of oligarchy, the overthrow of a regime presiding over extractive institutions heralds the arrival of a new set of masters to exploit the same set of pernicious extractive institutions.

The logic of this type of vicious circle is also simple to understand in hindsight: extractive political institutions create few constraints on the exercise of power, so there are essentially no institutions to restrain the use and abuse of power by those overthrowing previous dictators and assuming control of the state; and extractive economic institutions imply that there are great profits and wealth to be made merely by controlling power, expropriating the assets of others, and setting up monopolies.

Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. […] The basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society. The different histories and social structures of the countries lead to the differences in the nature of the elites and in the details of the extractive institutions. But the reason why these extractive institutions persist is always related to the vicious circle, and the implications of these institutions in terms of impoverishing their citizens are similar—even if their intensity differs.

The changes in economic institutions in China were radical. China broke the mold, even if it did not transform its political institutions. As in Botswana and the U.S. South, the crucial changes came during a critical juncture—in the case of China, following Mao’s death. They were also contingent, in fact highly contingent, as there was nothing inevitable about the Gang of Four losing the power struggle; and if they had not, China would not have experienced the sustained economic growth it has seen in the last thirty years. But the devastation and human suffering that the Great Leap Forward and the Cultural Revolution caused generated sufficient demand for change that Deng Xiaoping and his allies were able to win the political fight.