Why Nations Fail, Part I

The Island of Hispaniola is home to two nations, Haiti and the Dominican Republic. The Dominican Republic has a booming tourism sector that supports a growing economy with an average per capita income of $9,286. To the west of the Dominican Republic is Haiti, whose per capita income is $1,235, about one seventh of that of the Dominican Republic, and has a tourism industry that is almost non-existent. Over the past fifty years the total output of the Dominican Republic has grown exponentially while Haiti’s has actually shrunk (one of only four countries in the world to have done so). One of the most devastating differences between the two nations is seen from an aerial photo of the Haitian Dominican border; The Dominican Republic is full of lush green trees while Haiti is a brown desert, one of the tragic results from Haiti’s massive deforestation.

These islands have similar populations with similar histories, yet one has managed to develop into a real economy while the other has languished behind.

Haiti and the Dominican Republic are not the only two nations that share a boarder and yet occupy two radically different realities. The United States and Mexico, North and South Korea, and Botswana and Zimbabwe are all nations that share a geographic boarder but are, in all other cases, worlds apart. The reason for this divergence, the reason why some nations steadily progress forward while others stay in a state of arrested development is because of their poor political institutions. This is the topic of Why Nations Fail by Daron Acemoglu and James Robinson. This book is a fascinating exploit into poverty throughout history and in the modern day. The overall topic of poverty in the developing world is one that could fill an entire library, and I don’t want to presume that I can cover all of it in one blog post. That said, this book has been incredibly instructive for me in understanding Haiti’s history and Haiti’s current day poverty.

The thesis of Acemoglu and Robinson’s work is that nations fail to develop because those nation’s governments pursue policies that prevent growth from taking place. Economic growth is caused by Creative Destruction; the replacement of old methods and technologies with new ones. The US and other developed countries have been able to move forward because we have figured out how to be more efficient; we have developed superior methods and technologies and let the new replace the old. We replaced horses and plows with tractors and combines that are capable of harvesting more food, we replaced type writers with computers so we could process information more efficiently, we replaced the telegram with phones so people could communicated more clearly, we replaced latrines with toilets so people could have more sanitary homes. All of these inventions that pushed us into the future replaced something old. This type of cycle is destructive. Using a combine rather than manual labor means a farm can produce the same harvest with a fraction of the needed labor. These people can now go do something else productive, such as producing clothing or manufacturing cars. This is exactly what happened in America from 1870-1920. In 1870, American farms employed over two thirds of the US labor force but by 1920 fewer than 10% of Americans worked on farms. There were incredible technological breakthroughs that made farming a much less labor-intensive process that required many fewer people. The rural farmers who no longer needed to farm moved to the cities to work in the new factories. Though this mechanization greatly decreased the number of farm jobs, it opened up many new and better jobs in manufacturing. The agricultural mechanization was destructive for one sector, but that destruction made room for even more advancement, allowing the farm laborers to find more lucrative work and pushing the overall American population forward. We are all better off in a society where we are not directly responsible for harvesting our own dinners.

Every time this creative destruction takes place, every time new technology replaces old technology, it has the potential to replace the people benefitting from the old technology. When farming was a manual, labor intensive process, the people the economy benefitted most were those who owned large pieces of land and had many farm hands (or slaves) working for them. The only ones who could amass wealth were those who could farm large pieces of land. When mechanization hit the agricultural sector during the end of the nineteenth century, having large plots of land and lots of farm hands didn’t create as much wealth anymore. Now someone with the right technology could produce more than someone with an army of farm hands. The landowners who couldn’t keep up with the new technology, of which there were many, faded away. On top of that, there was a new economic elite introduced, those who built and owned factories. The entire economic landscape was redrawn, there were more jobs open to the general working person, and the helm leading the economy got bigger with different people sitting at it. Today the same process is happening. In the 1990’s an entirely new group of men and women, tech entrepreneurs, took command of a huge section of the economy. People like Bill Gates, Larry Ellison, Steve Jobs, Sergey Brin, Larry Page, and Jeff Bezos, (just to name a few) commanded the technology sector of the US and replaced some of the older business leaders of the 50’s and 60’s. One of the clearest examples of this transition is seen in book publishing. The publishing industry used to be organized by a select number of large publishers. There was some turnover, but mostly the same big publishing houses dominated the market. When Amazon.com came into the picture in the 1990’s, the entire playing field was reorganized. There are now people making a living off of their self published works that they sold on Amazon. Now with the invention of the Kindle e-reader, this creative destruction is moving another step forward. This group of authors would previously be disenfranchised by the old economy, but with the advent of creative destruction they are able to make a living from writing. The old publishing houses who used to dominate and control a large section of the publishing industry have to reinvent themselves if they are to keep up in the modern day market.

So what does all of this have to do with poverty? What does agricultural mechanization have to do with Haiti being drastically poorer than its next-door neighbor? Creative destruction, the force that pushes development forward, is hampered or not allowed by some nations’ governments. On the surface this sounds ridiculous, why would any government want to prohibit growth? How could any government that prohibits growth stay in power? The answer lies in the fact that creative destruction means the control of the economy is constantly changing.

Countries like Haiti, countries that suffer from continuing poverty, have governments that are deeply entrenched in the economy. The small group of political elite who craft the economic policy craft it to ensure that they will stay in power. The more the economy is positioned by public policy to benefit the ruling elite, the more power the elite have to exert on the economy. Eventually, the economy is positioned to benefit the small governing elite at the expense of the general population. The government shapes this economy that benefits only them at the expense of the rest of the economy. The government is sure to prevent any progression in technology or the introduction of new technology, because it would cause for creative destruction, causing them to be replaced. In order for a society to prosper, governments have to not only act fairly and equitable to its citizens, but it must provide certain services that benefit the society and foster economic growth and competition. These services differ depending on the society, but they are usually activities that promote property rights, develop infrastructure and public services, and enforce formal contracts and agreements. Many extractive governments resist implementing these policies because they may foster creative destruction. Without things like property rights, people can’t amass any wealth or move up in the economy, so there is no creative destruction and thus no new growth in the economy, keeping those running the economy continually in power. In Why Nations Fail, Acemoglu and Robinson use the terms inclusive and extractive institutions to describe the different types of government institutions that either promote or hamper development. Inclusive institutions are institutions that include everyone in the economy and allow for creative destruction to take place. These nations include the United States, the United Kingdom, Japan, and the rest of the developed world. Extractive institutions are institutions run by a small elite group that extracts wealth from the rest of the society to keep themselves in power. A classic example of this is the feudal system in Europe during the middle ages. The feudal lords tied peasants to their land, denying them any formal rights or economic justice, and taxing the heavily. This maintained their stature as wealthy landowners at the expense of the peasants. Today, the starkest examples of extractive institutions can be seen in communist North Korea and Robert Mugabe’s Zimbabwe.

Though not as bad as modern day North Korea or Zimbabwe, Haiti’s history is largely a history of extractive institutions. Understanding this history explains not only why Haiti is so poor today, but also the constraints on Haiti’s political system and its potential for growth in the future. When I started writing this blog post it was supposed to be a few paragraphs, and now it is almost three pages and I haven’t begun to discuss Haiti’s history or what we can do to respond to these policies. If you are still with me I thank you very much for bearing through this long post. I have decided to break this post up into separate posts. Tomorrow I will post on Haiti’s history of extractive institutions and its potential for the future.