It's the institutions, stupid!

Why Nations Fail
I wonder who he could mean…

This summer I’ve been reading Acemoglu and Robinson’s “Why Nations Fail.” It’s a terrific read in case you haven’t gotten your hands on it – Ángel Alayón did a great job summarizing it a few months ago.

Now, I won’t bore you with the details of the book. I will, however, outline the authors’ basic point, and go from there.

The book draws a distinction between countries that have “inclusive” economic institutions and those that have “extractive” ones. The former includes countries that “allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish.” The latter includes countries whose institutions “are designed to extract incomes and wealth from one subset of society to benefit a different subset.”

The authors continue,

“To be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract; it also must permit the entry of new businesses and allow people to choose their careers…

Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Economic institutions are then often structured by this elite to extract resources from the rest of society. Extractive economic institutions thus naturally accompany extractive political institutions.”

Clearly Venezuela has extractive (literally, extractive) economic and political institutions. Obviously, if one agrees with the authors, one has to move toward inclusive economic institutions. But how?

You will read a lot in the coming months about what Venezuela needs to do to get out of the jam that chavenomics has left us in – scarcity, inflation, devaluation, general rise in poverty. But whenever you hear the experts, ask yourselves if what they are proposing is enough.

Ask your economists, your politicians, and your thinkers if anything they propose signifies a shift to inclusive institutions. They probably do at some level. For example, in our “roadmap” series of posts, Quico has written about the need for macroeconomic stability. I have written about the importance of embracing globalization. Both things require an institutional re-design in order to be succesful – for example, free-trade agreements or constitutional rules regarding the Central Bank. Those are shifts to “inclusive” institutions.

In other words, we need to focus on the “how” and not just on the “what.” That is what makes proposals such as those of loyal reader “extorres,” for example, so appealing: they are so radical they imply an automatic switch from extractive to inclusive institutions. It is all shockingly simple, yet horribly complicated to implement.

As we continue thinking of the long term, we need to do our best to keep in mind the institutional re-design we require. Otherwise, we’ll just be blowing smoke out of our behinds.

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