America held its national elections on November 5 and answered a BIG Question “ Where to America?” The electorate decided to return a former President with the avowed intention to disrupt.
From October 28 – November 1, the World Bank Group (WBG) announced at its Annual Meeting that it had raised about $10.5 billion for the 21st replenishment of its International Development Association (IDA), dedicated to providing low interest loans and grants to the poorest countries in the world.
For more than a decade now, the book “WHY NATIONS FAIL: The Origins of Power, Prosperity, and Poverty” written by Daron Acemoglu and James A. Robinson, published in 2013, sat unread on my bookshelf. When in October 2024, Acemoglu of MIT, and Robinson of the University of Chicago, along with Simon Johnson of MIT, were awarded the Nobel Prize in Economic Sciences, I rushed to read this book. The major thesis is that “extractive” economic and political institutions help to explain better why poverty overwhelms some States, and why these States ultimately fail. Acemoglu and Robinson explain differences in prosperity between nations, by highlighting the importance of societal institutions in a country’s prosperity and posit that societies with a poor rule of law, and institutions that exploit the population, do not generate growth or change for the better.
When Europeans colonized large parts of the globe, the aim was to exploit the indigenous population and extract resources for the benefit of the home country. In some places, the colonizers formed inclusive political and economic systems for the long-term benefit of European migrants. Said another way, extractive institutions provided short-term gains for the people in power. The Iron Law of Oligarchy, or elite control of extractive institutions can lead to forms of “crony capitalism”.
The argument put forward by some economists and intellectuals in the 1960s and 1970s about the corrosive impact of years of European colonialism, became almost “unacceptable” in the late 1980s and 1990s. This argument was seen more as a crutch that Africans, Asians, and Latin Americans, leaned on all too easily, to “explain” their economic, political, social, and institutional failures. And yet, in 2013, Acemoglu and Robinson wrote:
“ Nations fail economically because of extractive institutions. These institutions keep poor nations poor and prevent them from embarking on a path to economic growth. This is true today in Africa, (Zimbabwe and Sierra Leone); in South America, (Colombia and Argentina); in Asia (North Korea and Uzbekistan); and in the Middle East (Egypt). There are noticeable differences……. but in all cases 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.”
In 2013, Acemoglu and Johnson posed three big questions:
First, Can China, which had already built an authoritarian growth machine, continue to grow at such high speed, and overwhelm the West? A decade later, an answer to the speed of growth question, is clearly YES. China’s economic growth has continued, even if it has slowed in recent years. On the overwhelming the West question, China, with Russia and others, have declared a “New World Order”. This group is not yet in a position to overwhelm the West.
Second, Are America’s best days behind it? Is America moving from a virtuous circle in which efforts by elites to aggrandize power are resisted, or to a vicious circle that enriches and empowers a small minority? Some would respond in the affirmative, given the endorsement of Trumpism and the repudiation of the “democracy in danger” arguments forwarded by Harris.
Third, what is the most effective way to help move billions of people from the rut of poverty to prosperity? More philanthropy from wealthy nations of the West? They wrote:
“foreign aid is not a very effective means of dealing with the failure of nations around the world today. Far from it. Countries need inclusive economic and political institutions to break out of the cycle of poverty. Foreign aid can do little in this respect, and certainly not with the way it is currently organized.…. foreign aid, within the framework of given institutions in recipient nations, will do little to spur sustained growth” .
Ajay Banga came to the WBG in 2023 as its 14th President. He was a Biden/Harris administration appointee for a five-year term starting June 2023, and he replaced David Malpass, a Donald Trump appointee in 2019 . Banga has just started a “reform” in the WBG’s approach to Aid. The use of the $10.5 billion of IDA, is intended to be a central part of this revamped approach. A Big Question is will it work?
Disclaimer
Member’s blog posts reflect the views of the author(s), drawing on prior research or personal experience. Freedom of expression is an essential part of the 1818 Society’s culture. The 1818 Society® is a nonpartisan, independent organization and does not take institutional positions. Members are welcome to add their comments in the box below.
KEYWORDS aid, extractive, inclusive, institutions, poverty
I worked in Zimbabwe, apparently a classic “extractive economy” in the early days of the Mugabe regime. Then it had a flourishing agricultural sector, with tobacco the main export crop, plus small-scale mining and manufacturing. It was food self-sufficient, had decent education system open to all, and no extreme poverty. There was a relatively small but growing African middle class. Yes, “colonialists” owned most of the land and businesses. But neither the country’s development path nor its business management methods struck me as “extractive”. The development model seemed to reflect its “comparative advantage”, most wealth stayed in the country, and opportunities for the native people were improving as their level of education and skills rose.
Mugabe then proceeded to destroy the economy. I do not accept that the former supposedly “extractive” colonial development model made this outcome inevitable. It was Mugabe’s policies that “extracted” Zimbabwe’s former wealth and created today’s poverty-ridden country.
Richard, with respect to the first ‘big’ question that you say A&R posed in 2013, it is important to note that their entire thesis about the trajectory of institutional development rests on the assumption that “China must fail.” Theirs is a compelling variant on the “West is the Best” story that various scholars have propounded. A&R posit that “extractive” (read non-democratic, authoritarian) political regimes like that of China do not allow for the creative destruction that is necessary for the technological advancement on which long-term economic growth depends. But while growth in China has recently slowed, in PPP terms (the fairest yardstick), in 2016 it became the largest economy in the world and more recently its navy has become larger than that of the USA. Also, Chinese scholars now publish more articles in peer-reviewed (Western) scientific journals than any other nation (technologically, they are not mere copycats) and, through their contribution to lowering the price of solar panels, have largely had a bigger potential impact on reversing climate change than any other nation. One could argue that we now live in the Chinese century (2016-?), following respectively the British Century (1815-1914) and the American Century (1914-2015). Yes, we live in interesting times!