«James A. Robinson Harvard University Department of Government and IQSS May 2009 Paper prepared for the 2009 World Bank ABCDE conference in Seoul June ...»
- and of the new entrepreneurs. It chose these goals even at the expense of capital formation and of the economy's capacity to transform.” Elsewhere, in a very relevant passage Díaz Alejandro notes (1970, p. 65), “The main problem arises in that policies which are best from the viewpoint of economic efficiency (e.g. free, or nearly free, trade) generate an income distribution favorable to the owners of the relatively most abundant factor of production (e.g. land) and therefore strengthen the position of the traditional elite... long run efficiency and a popular income distribution could only be reconciled by a sophisticated fiscal system, not an easy thing to achieve.” Comparing the Glorious Revolution to the Peronist Revolution one can see that what was missing from the latter was the Statute of Monopolies. This discussion also indictates another large difference in the circumstances between the East Asian Miracle economies and Latin America or Africa. In none of the East Asian countries were there strong rural interests who could either oppose industrialization or be exploited by urban groups. Singapore and Hong Kong had no hinterland and in Japan, Taiwan and South Korea agrarian reforms removed the power of rural elites.
Why did Britain have a statute of monopolies but not Argentina? These differing outcomes have deep roots in the historical development of the institutions of these societies.
The policy outcomes chosen in Latin America in the 1930s and 1940s were the path dependent outcome of a process of institution formation that went back to the colonial period (Engerman and Sokoloff, 1997, Acemoglu, Johnson and Robinson, 2001). Latin American colonial societies developed economic institutions aimed at creating and extracting rents from indigenous peoples and slaves. This greatly benefited a narrow elite at the expense of society, elite something responsible for the huge levels of inequality in that region.
The political coalition that formed in Latin America in the 1930s and the policies it adopted was a very path dependent one which reflected the institutional history of Latin America with a focus on rent creation and extraction. This led to monopolies and a highly clientelistic political strategy which mirrored that of the previous oligarchies. The path of institution creation in Britain was very different and in the late Medieval and Early Modern period a series of shocks and structural changes radically changed the balance of power in society towards one which not only empowered those with different policy interests, but also created a series of de facto and de jure checks and balances out of which such measures as the Statute of Monopolies arose (see Acemoglu, Johnson and Robinson, 2005a, Pincus, 2009).
The successful promotion of industry in East Asia is a consequence of the historical development path there. I emphasized some of the structural factors which influenced the costs and benefits to political elites of industrial policy. One more factor merits emphasis.
South Korea and Taiwan, both former Japanese colonies, were heavily influenced by the experience of defense modernization on which Japan had embarked after the Meiji Restoration in an attempt to avoid being colonized by Europeans. Such a goal also heavily motivated Sun Yat Sen and the Chinese nationalist movement which took over Taiwan in
1948. Moreover, their precarious international position and intense competition with North Korea and China created large incentives for the governments to promote industry. These factors made it far more imperative that South Korea and Taiwan develop a strong industrial sector.
My interpretation of this evidence suggests that failed industrial policy, like bad policy more generally, is the consequence of perverse political incentives. The successful promotion of industry therefore requires changes in the political equilibrium in such a way as to align the incentives of the political powerful with those of society. This may be achieved by changes in political institutions or it may be achieved by endogenous changes in the balance of de facto power in society. The successful industrial policy of East Asian countries reflects the very different political equilibrium which emerged historically in this part of the world compared to Latin America or Sub-Saharan Africa.
The historical roots of these development paths and the endogenous nature of industrial policy do not lend themselves to simple policy proposals because it is not clear how to replicate the political equilibrium of Taiwan or South Korea elsewhere in the World.
My discussion should have made clear that there are many unique factors associated with the experience of these countries. Industrial policy – promoting industry – requires an understanding of the political equilibrium of a society, of the actors and their interests, the political institutions, of de facto and de jure power and how these pieces all fit together. In such a situation there will be many potential ways to promote industry. One would be intervening to strengthen those with a vested interest in this outcome. Another would be to change political institutions to try to induce greater political competition in the hope that this would stimulate more socially efficient policies. An alternative to nudging the political equilibrium would be to try to work within it, for example by creating incentives for existing political elites to change policy. I cannot sketch here in any detail what a framework for this type of industry policy would look like, but I hope I have made clear why we need to think in this way.
In this essay I have tried to make a simple argument. There are good reasons to believe from economic theory that industry policy may be socially desirable and may stimulate economic growth and development. Some salient examples support this idea – some industry policies really do seem to have worked. Yet some have not. I have argued that the difference between these cases lies in the politics of the different societies that adopted the policies. Like any socially desirable policy, industry policy may not necessarily be an outcome of a political equilibrium and if it is it may not be of a desirable form (it may be more about redistributing income or political power than promoting economic growth).
Thus the reason that industry policy failed in so many African countries in the 1960s is the same as the reason that economic policies were generally very bad in that region – this was because policies were driven by the desire to maintain political power and this was generally inconsistent with economic growth. The difference between these cases, and less extreme ones in Latin America, and the East Asian countries is that the political equilibrium in these latter ones was very different. The geopolitical and historical situation in East Asia was distinct. Finally, I have argued that if this political economy perspective is correct then this entails thinking about industry policy in a new way. It is not sufficient to just propose good economic policies, one must propose a way in which they will be endogenously chosen by
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