Saturday, 5 May 2012

Why Nations Fail thoughts, part 5

A&R argue that economic growth under extractive institutions is unlikely to be permanent. This is also what North, Wallis and Weingast think, and it leads all these authors to be skeptical of China’s present growth spurt. A&R use the analogy of the Soviet Union, which also grew fast up until the 1970s before crashing. There may well be a slowdown, or even a political crisis, in China, but I don’t believe in the USSR analogy, for the following not-very-scientific reason. Visitors to Soviet bloc countries in the 1960s found them drab and depressing places: think shortages, rationing and queues, bad service, no consumer choice, crappy cars, unhelpful and corrupt officials.... Visitors to China in 2011 come back with very different impressions – not uniformly positive, but far from stagnation – fast trains, massive growth, a booming middle class. Even the problems, like the arrogance of the newly wealthy, arise from rapid change. 

My instincts are that the statistics are not the whole story; and that if politics fights economics in China, economics will win and the new bourgeoisie will replace the Communists with a more pliant executive committee, or even perhaps a system of teams which compete for office. In short, economic growth can throw up new assertive classes and generate its own political pressure. 

There are certainly places which do fit the idea of unsustainable growth (Pakistan, Venezuela) and here growth tends to be based on commodity prices or foreign aid rather than innovation. (By the way, innovation does not have to mean “being the next Apple”. There is also what Dani Rodrik calls “within-the-frontier innovation”, ie within the technological frontier, ie being the first firm in your province to sell bottled lemonade or littlepackets of shampoo.) China just looks different to these cases.

[That's enough of my incoherent thoughts on this very interesting book. Go and read it!]