Jun 13, 2012

"Why Nations Fail" and "The Calculus of Consent'

The Calculus, Institutional Economics and Development Economics
The economic analysis of politics as elaborated by Buchanan and Tullock in The Calculus has had ample influence on different fields (political economy, institutional economics, constitutional economics, law and economics, etc.). It was the origin of Public Choice. In one way or another these fields are linked to development economics. In fact, one can argue that most economics is development economics. Since the inception of systematic economic analysis by Adam Smith, economics has dealt with wealth creation to escape poverty. In this section we limit our discussion to the field of institutional economics as it relates to economic development, and how these two fields are linked to some ideas in Calculus. 
The fundamental question in institutional economics has to do with why institutions work in some countries but fail in others. In other words, why in some countries the existing formal and informal institutions lead to prosperity, but in other countries perpetuate poverty. In their new book Why Nations Fail, Acemoglu and Robinson argue that nations fail because they are incapable of generating inclusive institutions. In many developing countries institutions favor the minority and exclude the majority. To be clear, some powerful individuals (the minority) find it in their best interests to stick to the status quo, which is characterized by policies that benefit their political and economic interests. From Buchanan and Tullock we know that when few individuals in a group define the rules of the game, the rest of the society pays high external costs. In fact, Why Nations Fail and The Calculus seem to propose a similar argument, although through different methods: the importance of inclusion. Why Nations Fail is an empirical analysis, and it contains case studies of several countries. The authors show that less institutional inclusion leads to economic and political failure. Take the case of Botswana, for example. Acemoglu and Robinson argue that there were key features in the history of Botswana where institu- tional inclusion took place. One was the institution called kgotla. The kgotla was a local forum of discussion where participants directly deliberated on public matters. Botswana was a British protectorate (as opposed to a colonial territory). The British allowed local institutions like the kgotla to continue to exist. In other African countries these kinds of institutions did not survive the colonial period. The kgotla is inclusive; almost everybody in the village, town, or city is allowed to participate. In terms of Calculus, the kgotla has low external costs. We know also that it has high costs to reach agreements. 
A key moment in the history of Botswana happened when diamonds were discovered in the 1960s. After negotiating the end of the protectorate, the first president of the country, Seretse Khama, convinced the leaders of the different tribes that diamonds would have to be used to benefit the country as a whole and not a particular region. To sum up, the argument that Acemoglu and Robinson make is that the development of pluralistic, inclusive institutions allowed Botswana to prosper and become a middle-income country in Africa, in spite of being land- locked, being very poor before independence, and having a territory almost half of which is covered by desert. 
In our description of Part III of The Calculus we showed the importance of unanimity for Buchanan and Tullock. The Calculus of Consent is an abstract book. Its call for unanimity as the constitutional rule is a call for absolute inclusion. 
Broadly speaking, one can see that the book Why Nations Fail echoes an abstract proposition that Buchanan and Tullock developed 50 years ago.

No comments:

Post a Comment