PACKING
THE COURT
"(USA)...Congress
certainly would not have approved this, but
then Roosevelt could have appealed to the nation, asserting
that Congress was impeding the necessary measures to fight the
Depression. He could have used the police to close Congress. Sound
farfetched? This is exactly what happened in Peru and Venezuela in
the 1990s. Presidents Fujimori and Chavez appealed to their popular
mandate to close
uncooperative congresses and subsequently rewrote their constitutions
to massively strengthen the powers of the president..."
"… In
1990 Argentina finally experienced a transition between
democratically elected governments—one democratic government
followed by another. Yet, by this time democratic governments did not
behave much differently from military ones when it came to the
Supreme Court. The incoming president was Carlos Saϊl Menem of the
Peronist Party. The sitting Supreme Court had been appointed after
the transition to democracy in 1983 by the Radical Party president
Raϊl Alfonsνn. Since this was a democratic transition, there should
have been no reason for Menem
to appoint his own court."
"… A
Supreme Court can have power if it receives significant
support from broad segments of society willing to push back attempts
to vitiate the Court’s
independence.
That has been the case in the United States, but not Argentina."
EL
CORRALITO
"Argentina
was in the grip of an economic crisis in late 2001. For three
years, income had been falling, unemployment had been rising, and the
country had
accumulated
a massive international debt. The policies leading to this situation
were adopted after 1989 by the government of Carlos Menem, to stop
hyperinflation and stabilize the economy. For a time they were
successful.
In
1991 Menem tied the Argentine peso to the U.S. dollar. One peso was
equal to one dollar by law. There was to be no change in the exchange
rate. End of story. Well, almost. To convince people that the
government really meant to stick to the law, it persuaded people to
open bank accounts in U.S. Dollars..."
"… the
government then forcibly converted all the dollar bank accounts into
pesos, but at the old one-for-one exchange rate. Someone who had had
$1,000 saved suddenly found himself with only $250. The government
had expropriated three-quarters of people’s savings."
"… During
the periods of civilian rule there were elections—a democracy of
sorts. But the political system was far from inclusive. Since the
rise of Peron
in the 1940s, democratic Argentina has been dominated by the
political party he created, the Partido Justicialista, usually just
called the Peronist
Party. The Peronists
won elections thanks to a huge political machine, which succeeded by
buying votes, dispensing
patronage, and engaging in corruption, including government contracts
and jobs in exchange for political support. In a sense this was a
democracy, but it was
not pluralistic. Power was highly concentrated in the Peronist Party,
which faced few constraints on what it could do, at least in the
period when the military restrained from throwing it from power. As
we saw earlier, if the Supreme Court challenged a policy, so much the
worse for the Supreme Court.
In
the 1940s, Peron
had cultivated the labor movement as a political base. When it was
weakened by military repression in the 1970s and ’80s, his party
simply switched to buying votes from others instead. Economic
policies and institutions were designed to deliver income to their
supporters, not to create a level playing field. When President Menem
faced a term limit that kept him from being reelected in the 1990s,
it was just more of the same; he could simply rewrite the
constitution and get rid of the term limit. As El Corralito shows,
even if Argentina has elections and popularly elected governments,
the government is quite able to override property rights and
expropriate its own citizens with impunity. There is little check
on Argentine presidents and political elites, and certainly no
pluralism."
"… So
Argentina at first appears a world apart from Peru or Bolivia, but it
is really not so different once you leave the elegant boulevards of
Buenos Aires. That the preferences and the politics of the interior
got embedded into Argentine institutions is the reason why the
country has experienced a very similar institutional path to
those of other extractive Latin American countries.
That
elections have not brought either inclusive political or economic
institutions is the typical case in Latin America. In Colombia,
paramilitaries can fix one-third of national
elections. In Venezuela today, as in Argentina, the democratically
elected government of Hugo Chavez attacks its opponents, fires them
from public-sector jobs, closes down newspapers whose editorials it
doesn’t like, and expropriates property. In whatever he does,
Chavez is much more powerful and less constrained than Sir Robert
Walpole was in Britain in the 1720s, when he was unable to condemn
John Huntridge under the Black Act. Huntridge would have fared much
less well in present-day Venezuela or Argentina.
While
the democracy emerging in Latin America is in principle diametrically
opposed to elite rule, and in rhetoric and action it tries to
redistribute rights and opportunities away from at least a segment of
the elite, its roots are firmly based
in extractive regimes in two senses. First, inequities persisting for
centuries under extractive regimes make voters in newly emerging
democracies vote in favor of politicians with extreme policies. It is
not that Argentinians are just naοve and think that Juan Peron
or the more recent Peronist
politicians such as Menem or the Kirchners are selfless and looking
out for their interests, or that Venezuelans see their salvation in
Chavez.
Instead, many Argentinians and Venezuelans recognize that all other
politicians and parties have for so long failed to give them voice,
to provide them with the most basic public services, such as roads
and education, and to protect them from exploitation by local elites.
So many Venezuelans today
support
the policies that Chavez
is adopting even if these come with corruption and waste in the same
way that many Argentinians supported Peron’s
policies in the 1940s and 1970s. Second, it is again the underlying
extractive institutions that make politics so attractive to, and so
biased in favor of, strongmen such as Peron
and Chavez,
rather than an effective party system producing socially desirable
alternatives. Peron,
Chavez, and
dozens of other strongmen in Latin America are just another facet of
the iron law of oligarchy, and as the name suggests, the roots of
this iron law lies in the underlying elite-controlled regimes"
KEEPING
THE PLAYING FIELD AT AN ANGLE
"...Many
sectors of the economy (Egypt)
were dominated by state-owned
enterprises.
Over the years, the rhetoric of socialism lapsed, markets opened, and
the private sector developed.
Yet
these were not inclusive markets, but markets controlled by the state
and by a handful of businessmen allied with the National Democratic
Party (NDP), the political
party founded by President Anwar Sadat in 1978. Businessmen became
more and more involved with them under the government of Hosni
Mubarak."
"… In
many sectors of the economy (Egypt),
businessmen persuaded the government to restrict entry through state
regulation. These sectors included the media, iron and steel, the
automotive industry, alcoholic beverages, and
cement.
Each sector was very concentrated with high entry barriers protecting
the politically connected businessmen and firms. Big businessmen
close to the regime, such as Ahmed Ezz (iron and steel), the Sawiris
family (multimedia, beverages, and telecommunications), and Mohamed
Nosseir (beverages and telecommunications) received not only
protection from the state but also government contracts and
large bank loans without needing to put up collateral..."
"The
economic reforms of the 1990s promoted by international financial
institutions and economists were aimed at freeing up markets and
reducing the role of the state
in the economy. A key pillar of such reforms everywhere was the
privatization of state-owned assets. Mexican privatization, instead
of increasing competition, simply turned state-owned monopolies into
privately owned monopolies, in the process
enriching politically connected businessmen such as Carlos Slim.
Exactly the same thing took place in Egypt.
The
businesspeople connected to the regime were able to heavily influence
implementation of Egypt’s privatization program so that it favored
the wealthy business elite—or the “whales,” as they are known
locally. At the time that
privatization
began, the economy was dominated by thirtytwo of these whales."
WHY
NATIONS FAIL
"… the
Egyptian Revolution was more a coup by a group of military
officers. When Egypt changed sides in the cold war and became
pro-Western, it was therefore relatively
easy, as well as expedient, for the Egyptian military to change from
central command to crony capitalism as a method of extraction."
"… extractive
political institutions have created extractive economic institutions, transferring
wealth and power toward the elite.
The
intensity of extraction in these different countries obviously varies
and has important consequences for prosperity. In Argentina, for
example, the constitution and democratic elections do not work well
to promote pluralism, but they do function much better than in
Colombia..."
"… the
long-run effect is the same: the state all but remains absent, and
institutions are extractive. In all these cases there has been a long
history of extractive institutions since at least the nineteenth
century.
Each
country is trapped in a vicious circle. In Colombia and Argentina,
they are rooted in the institutions of Spanish colonial rule..."
"The
solution to the economic and political failure of nations today is to
transform their extractive institutions toward inclusive ones. The
vicious circle means that this is not easy. But it is not impossible,
and the iron law of oligarchy is not inevitable. Either some
preexisting inclusive elements in institutions, or the presence of
broad coalitions leading the fight against the existing regime, or
just the contingent nature of history, can break vicious circles.
Just like the civil war in Sierra Leone, the Glorious Revolution in
1688 was a struggle for power. But it was a struggle of a very
different nature than the civil war in Sierra Leone.
Conceivably
some in Parliament fighting to remove James II in the wake of the
Glorious Revolution imagined themselves playing the role of the new
absolutist, as Oliver Cromwell did after the English Civil War. But
the fact that Parliament was already powerful and made up of a broad
coalition consisting of different economic interests and different
points of view made the iron law of oligarchy less likely
to apply in 1688..."
THREE
AFRICAN CHIEFS
"The
South African anthropologist Isaac Schapera describes how the kgotla
worked as follows:
all
matters of tribal policy are dealt with finally before a general
assembly of the adult males in the chief’s kgotla (council place).
Such meetings are very frequently held … among the topics discussed
… are tribal disputes, quarrels between the chief and his
relatives, the imposition of new levies, the undertaking of new
public works, the promulgation of new decrees by the chief … it is
not unknown for the
tribal assembly to overrule the wishes of the chief. Since anyone may
speak, these meetings enable him to ascertain the feelings of the
people generally, and provide the latter with an opportunity of
stating their grievances. If the occasion calls for it, he and his
advisers may be taken severely to task, for the people are seldom
afraid to speak openly and frankly.
Beyond
the kgotla, the Tswana chieftaincy was not strictly hereditary
but open to any man demonstrating significant talent and ability.
Anthropologist John Comaroff studied
in detail the political history of another of the Tswana states, the
Rolong. He showed that though in appearance the Tswana had clear
rules stipulating how the chieftancy
was to be inherited, in practice these rules were interpreted to
remove bad rulers and allow talented candidates to become chief. He
showed that winning the chieftancy was a matter of achievement, but
was then rationalized so that the successful competitor appeared to
be the rightful heir. The Tswana captured this idea with a proverb,
with a tinge of constitutional monarchy: kgosi ke kgosi
ka morafe, “The king is king by the grace of the people.”
At
independence, Botswana was one of the poorest countries in the world;
it had a total of twelve kilometers of paved roads, twenty-two
citizens who had graduated from university, and one hundred from
secondary school. To top it all off, it was almost completely
surrounded by the white regimes of South Africa, Namibia, and
Rhodesia, all of which were hostile to independent African countries
run by blacks. It would have been on few people’s list of countries
most likely to succeed. Yet over the next forty-five years, Botswana
would become one of the fastest-growing countries in the world. Today
Botswana has the highest per capita income in sub-Saharan Africa, and
is at the same level as successful Eastern European countries
such as Estonia and Hungary, and the most successful Latin American
nations, such as Costa Rica.
How
did Botswana break the mold? By quickly developing inclusive economic
and political institutions after independence. Since then, it has
been democratic, holds
regular and competitive elections, and has never experienced civil
war or military intervention. The government set up economic
institutions enforcing property rights, ensuring macroeconomic
stability, and encouraging the development of an inclusive market
economy. But of course, the more challenging question is, how did
Botswana manage to establish a stable democracy and pluralistic
institutions, and choose inclusive economic institutions, while most
other African countries did the opposite? To answer this, we have to
understand how a critical
juncture, this time the end of colonial rule, interacted with
Botswana’s existing institutions.
Early
stages of independence would play out very differently in Botswana,
again largely because of the background created by Tswana historical
institutions. In this,
Botswana exhibited many parallels to England on the verge of the
Glorious Revolution. England had achieved rapid political
centralization under the Tudors and had the Magna Carta and the
tradition of Parliament that could at least aspire to constrain
monarchs and ensure some degree of pluralism. Botswana also had some
amount of state centralization and relatively pluralistic tribal
institutions that
survived colonialism.
Though
the early growth in Botswana relied on meat exports, things changed
dramatically when diamonds were discovered. The management of natural
resources in Botswana also differed markedly from that in other
African
nations.
During the colonial period, the Tswana chiefs had attempted to block
prospecting for minerals in Bechuanaland because they knew that if
Europeans
discovered
precious metals or stones, their autonomy would be over. The first
big diamond discovery was under Ngwato land, Seretse Khama’s
traditional homeland.
Before
the discovery was announced, Khama instigated a change in the law so
that all subsoil mineral rights were vested in the nation, not the
tribe. This ensured that diamond
wealth would not create great inequities in Botswana. It also gave
further impetus to the process of state centralization as diamond
revenues could now be used
for building a state bureaucracy and infrastructure and for investing
in education."
THE
IRRESISTIBLE CHARM OF AUTHORITARIAN GROWTH
"(China)
… His real crime was to start a large project that would compete
with statesponsored companies and do so without the approval of the
higher-ups in the Communist Party. This was certainly the lesson that
others drew from the case.
The
Communist Party’s reaction to entrepreneurs such as Dai should not
be a surprise. Chen Yun, one of Deng Xiaoping’s closest associates
and arguably the major architect behind the early market reforms,
summarized the views of most party cadres with a “bird in a cage”
analogy for the economy: China’s economy was the bird; the party’s
control, the cage, had to be enlarged to make the bird healthier
and more dynamic, but it could not be unlocked or removed, lest the
bird fly away."
"… Even
if Chinese economic institutions are incomparably more inclusive
today than three decades ago, the Chinese experience is an example of
growth under extractive political institutions. Despite the recent
emphasis in China on innovation and technology, Chinese growth is
based on the adoption of existing technologies and rapid investment,
not creative destruction. An important aspect of this is that property
rights are not entirely secure in China. Every now and then, just
like Dai, some entrepreneurs are expropriated. Labor mobility is
tightly regulated, and the most
basic of property rights, the right to sell one’s own labor in the
way one wishes, is still highly imperfect. The extent to which
economic institutions are still far from being truly inclusive is
illustrated by the fact that only a few businessmen and -women would
even venture into any activity without the support of the local party
cadre or, even more important, of Beijing. The connection between
business and the party is highly lucrative for both.
Businesses
supported by the party receive contracts on favorable terms, can
evict ordinary people to expropriate their land, and violate laws and
regulations with impunity.
Those
who stand in the path of this business plan will be trampled and can
even be jailed or murdered"
"… Today
the party’s control over the media, including the Internet, is
unprecedented. Much of this is achieved through self-censorship:
media outlets know that they should not mention Zhao Ziyang or Liu
Xiaobo, the government critic demanding
greater democratization, who is still languishing in prison even
after he was awarded the Nobel Peace Prize. Self-censorship is
supported by an Orwellian apparatus
that can monitor conversations and communications, close Web sites
and newspapers, and even selectively block access to individual news
stories on the
Internet. All of this was on display when news about corruption
charges against the son of the general secretary of the party since
2002, Hu Jintao, broke out in 2009. The party’s apparatus
immediately sprang into action and was not only able to prevent
Chinese media from covering the case but also managed to selectively
block stories about the case on the New York Times and
Financial Times Web sites.
Because
of the party’s control over economic institutions, the extent of
creative destruction is heavily curtailed, and it will remain so
until there is radical reform in political institutions"
"… Argentina
was also one of the richest countries in the world in the nineteenth
century, as rich as or even richer than Britain, because it was the
beneficiary of the worldwide resource boom; it also had the most
educated population in Latin America.
But democracy and pluralism were no more successful, and were
arguably less successful, in Argentina than in much of the rest of
Latin America. One coup followed another, and as we saw in, even
democratically elected leaders acted as rapacious dictators. Even
more recently there has been little progress toward
inclusive economic institutions, and as we saw in,
twenty-first-century Argentinian governments can still expropriate
their citizens’ wealth with impunity."
YOU
CAN’T ENGINEER PROSPERITY
"...many
economies around the world ostensibly implementing such
reforms, most notably in Latin America, stagnated throughout the
1980s and ’90s. In reality, such reforms were foisted upon these
countries in contexts where politics went on as usual. Hence, even
when reforms were adopted, their intent was subverted, or politicians
used other ways to blunt their impact. All this is illustrated by the
“implementation” of one of the key recommendations of
international institutions aimed at achieving macroeconomic
stability, central bank independence. This recommendation either was
implemented in theory but not in practice or was undermined
by the use of other policy instruments. It was quite sensible in
principle. Many politicians around the world were spending more than
they were raising in tax revenue
and were then forcing their central banks to make up the difference
by printing money. The resulting inflation was creating instability
and uncertainty. The theory was that independent central banks, just
like the Bundesbank in Germany, would resist political pressure and
put a lid on inflation. Zimbabwe’s president Mugabe decided to heed
international advice; he declared the Zimbabwean central bank
independent in 1995. Before this, the inflation rate in Zimbabwe was
hovering around 20 percent. By 2002 it had reached 140 percent; by
2003, almost 600 percent; by 2007, 66,000 percent; and by 2008, 230
million percent!..."
"… the
nongovernmental organization (NGO) Seva Mandir to improve
health care delivery in the state of Rajasthan in India...
In
2006 Seva Mandir together with a group of economists, designed
an incentive scheme to encourage nurses to turn up for work in the
Udaipur district of Rajasthan.
The idea was simple: Seva Mandir introduced time clocks that would
stamp the date and time when nurses were in the facility. Nurses were
supposed to stamp their time cards three times a day, to ensure that
they arrived on time, stayed around, and left on time. If such a
scheme worked, and increased the quality and quantity of health care
provision, it would be a strong illustration of the theory that there
were easy solutions to key problems in development.
In
the event, the intervention revealed something very different.
Shortly after the program was implemented, there was a sharp increase
in nurse attendance. But this was very short lived. In a little more
than a year, the local health administration of the district
deliberately undermined the incentive scheme introduced by Seva
Mandir.
Absenteeism
was back to its usual level, yet there was a sharp increase in
“exempt days,” which meant that nurses were not actually
around—but this was officially sanctioned by the local health
administration. There was also a sharp increase in “machine
problems,” as the time clocks were broken. But Seva Mandir was
unable to replace them because local health ministers would not
cooperate"
THE
FAILURE OF FOREIGN AID
"… two
important lessons here. First, 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 typically do little in this respect, and certainly not with
the way that it is currently organized. Recognizing the roots of
world inequality and poverty
is important precisely so that we do not pin our hopes on false
promises. As those roots lie in institutions, foreign aid, within the
framework of given institutions in recipient nations, will do little
to spur sustained growth. Second, since the development of inclusive
economic and political institutions is key, using the existing flows
of foreign aid at least in part to facilitate such development would
be useful. As we saw, conditionality is not the answer here, as it
requires existing rulers to make concessions. Instead, perhaps
structuring foreign aid so that its use and administration bring
groups and leaders otherwise excluded from power into the
decision-making process and empowering a broad segment of population
might be a better prospect."
EMPOWERMENT
(Brazil) "… By late 1978, Lula was floating the
idea of creating a new political party, the Workers’ Party.
This was to be the party not just of trade unionists, however. Lula
insisted that it should be a party for all wage earners and the poor
in general. Here the attempts of union leaders to organize a
political platform began to coalesce with the many social movements
that were springing up.
In
taking over many local governments, something that accelerated
in the 1990s, the Workers’ Party began to enter into a symbiotic
relationship with many local social movements. In Porto Alegre the
first Workers’ Party administration after 1988 introduced
“participatory budgeting,” which was a mechanism for bringing
ordinary citizens
into the formulation of the spending priorities of the city. It
created a system that has become a world model for local government
accountability and responsiveness, and it went along with huge
improvements in public service provision
and the quality of life in the city. The successful governance
structure of the party at the local level mapped into greater
political mobilization and success at the national level. Though Lula
was defeated by Fernando Henrique Cardoso in the presidential
elections of 1994 and 1998, he was elected president of Brazil in
2002. The Workers’ Party has been in power ever since.
The
rise of Brazil since the 1970s was not engineered by economists of
international institutions instructing Brazilian policymakers on how
to design better policies or avoid market failures. It was not
achieved with injections of foreign aid. It was not the natural
outcome of modernization.
Rather,
it was the consequence of diverse groups of people courageously
building inclusive institutions.
Eventually
these led to more inclusive economic institutions. But the Brazilian
transformation, like that of England in the seventeenth century,
began with the creation of inclusive political institutions.
There
are many parallels between these historical processes of empowerment
and what took place in Brazil starting in the 1970s. Though one root
of the Workers’ Party
is the trade union movement, right from its early days, leaders such
as Lula, along with the many intellectuals and opposition politicians
who lent their support to the party, sought to make it into a broad
coalition. These impulses began to fuse with local social movements
all over the country, as the party took over local governments,
encouraging civic participation and causing a sort of revolution in
governance throughout the country. In Brazil, in contrast with
England in the seventeenth century or France at the turn of the
eighteenth century, there was no radical revolution igniting the
process of transforming political institutions at one fell swoop.
More
important, empowerment at the grass-roots level in Brazil ensured
that the transition to democracy corresponded to a move toward
inclusive political institutions, and thus was a key factor in the
emergence of a government committed to the provision of public
services, educational expansion, and a truly level playing field. As
we have seen, democracy is no guarantee that there will be pluralism.
The contrast of the development of pluralistic institutions in Brazil
to the Venezuelan experience is telling in this context. Venezuela
also transitioned to democracy after 1958, but this happened without
empowerment at the grassroots level and did not create a pluralistic
distribution of political power. Instead, corrupt politics, patronage
networks, and conflict persisted in Venezuela, and in part as a
result, when voters went to the polls, they were even willing to
support potential despots such as Hugo Chαvez, most likely because
they thought he alone could stand up to the established elites of
Venezuela. In consequence, Venezuela still languishes under
extractive institutions, while Brazil broke the mold.
One
other actor, or set of actors, can play a transformative role
in the process of empowerment: the media. Empowerment of society at
large is difficult to
coordinate
and maintain without widespread information about whether there are
economic and political abuses by those in power. We saw in chapter
11 the role
of the media in informing the public and coordinating their demands
against forces undermining inclusive institutions in the United
States. The media can also play a key role in channeling the
empowerment of a broad segment of society into more durable political
reforms, again as illustrated in our discussion in chapter
11, particularly in the context of
British democratization."
"… Fujimori
and Montesinos thought that controlling the media was much more
important than controlling politicians and judges. One of
Montesinos’s henchmen, General Bello, summed this up in one of the
videos by stating, “If we do not control the television we do not
do anything.”
The
current extractive institutions in China are also crucially dependent
on Chinese authorities’ control of the media, which, as we have
seen, has become frighteningly sophisticated.
As a Chinese commentator summarized, “To uphold the leadership of
the Party in political reform, three principles must be followed:
that the Party controls the armed forces; the Party controls cadres;
and the Party controls the news.”"
"… meaningful
change only when a broad segment of society mobilizes and
organizes in order to effect political change, and does so not for
sectarian
reasons
or to take control of extractive institutions, but to transform
extractive institutions into more inclusive ones.
Whether
such a process will get under way and open the door to further
empowerment, and ultimately to durable political reform, will depend,
as we have seen in many different instances, on the history of
economic and political
institutions,
on many small differences that matter and on the very contingent path
of history."
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