In the latest NY Review of Books, there’s a lengthy and somewhat critical review by Jared Diamond of Daron Acemoglu and James A. Robinson’s “Why Nations Fail: the Origins of Power, Prosperity, and Poverty.” Diamond is a natural choice for reviewer since his most famous book “Guns, Germs and Steel” addresses the same question, albeit with all the wrong answers. The authors of the reviewed book and Diamond do have one thing very much in common; they all discount the role of colonialism. For Acemoglu and Robinson, the main problem is the lack of “good institutions”, while for Diamond environment is key. That being said, there is a certain overlap in their work that the more upbeat passages in Diamond’s review reflects.
“Why Nations Fail” is very much preoccupied with the sort of side-by-side comparisons you see in television commercials, with one soft drink or antacid being weighed against the other.
The fence that divides the city of Nogales is part of a natural experiment in organizing human societies. North of the fence lies the American city of Nogales, Arizona; south of it lies the Mexican city of Nogales, Sonora. On the American side, average income and life expectancy are higher, crime and corruption are lower, health and roads are better, and elections are more democratic. Yet the geographic environment is identical on both sides of the fence, and the ethnic makeup of the human population is similar. The reasons for those differences between the two Nogaleses are the differences between the current political and economic institutions of the US and Mexico.
Yes, it is true that Arizona has “better” institutions than Mexico, but in comparison to Vermont or California, Arizona is positively medieval. The cops in Arizona are charged with terrorizing anybody with Latino features and the public schools are rapidly becoming havens of bigotry and superstition. In 2010, Arizona was the second poorest nation in the USA, next to Mississippi. For that matter, Nogales, Arizona is hardly a convincing advertisement for brand A considering the fact that one out of three families live in poverty. Perhaps a better area for investigation would be “Why Workers Fail” but one could hardly expect someone like Daron Acemoglu or James A. Robinson to bother with something as obviously grounded in class like that.
As to be expected, the authors also point to North and South Korea and East and West Germany as confirming their thesis. As grist for the anti-Communist mill, this is what you would naturally expect. However, a more interesting comparison would have been with Cuba and some other Caribbean island, maybe like Haiti. While Cuba obviously suffers from the economic effects of the collapse of the USSR and continued American enmity, it has been able to overcome its difficult circumstances and earn this praise from James Wolfensohn, the former head of the World Bank:
I think Cuba has done — and everybody would acknowledge — a great job on education and health, I have no hesitation in acknowledging that they’ve done a good job, and it doesn’t embarrass me to do it. …We just have nothing to do with them in the present sense, and they should be congratulated on what they’ve done.
One of the more telling flaws in “Why Nations Fail” is its inclusion of Britain as a poster child for “good institutions” and Argentina as its evil twin. Britain “adopted inclusive institutions, we are told, as a result of the Glorious Revolution of 1688 and preceding events”. Meanwhile, some “countries are notorious for their histories of bad institutions (think of Algeria, Argentina, Egypt, and Libya).” What leaps off the page, of course, is the role of French colonialism in Algeria, British in Egypt and Italian in Libya—something that does not enter the calculation of the authors or the reviewer.
Since Argentina has been independent since the early 19th century, one might presume that colonialism was not a factor. Indeed, in an online book titled “Economic Origins of Democracy and Dictatorship”, Acemoglu and Robinson devote sections to Britain and then Argentina without once mentioning the impact of the former on the latter.
But if you are seriously interested in understanding why nations fail, a good place to start is with the British role in Argentina in the post-independence era, something I looked into in a series of articles on that “failed” nation some time ago. I was inspired to write it since a liberal economist Brad DeLong, who shares many of Acemoglu and Robinson’s ideological assumptions, posed the question of why Australia and Canada “succeeded” and Argentina did not. In other words, DeLong was setting up the same kind of ahistorical brand-A, brand-B comparison that is pursued in “Why Nations Fail”. This is what I found out:
The most important sector of the Argentine ruling class in the 19th century was the ‘estancieros’, or ranchers. From 1820 onwards, they began to develop an alliance with British capital, which was seen as strategic for the goal of exploiting the country’s land-based riches. Arising from within its ranks, Juan Manuel de Rosas emerged as the primary spokesman for this class. British merchants played an important role in guaranteeing the Argentine rancher access to world markets. Smiling benignly on this interdependence, the British consul wrote:
the manufactures of Great Britain are becoming articles of prime necessity. The gaucho is everywhere clothed in them. Take his whole equipment – examine everything about him – and what is there not of raw hide that is not British? If his wife has a gown, ten to one that it is made at Manchester; the camp-kettle in which he cooks his food, the earthenware he eats from, the knife, his poncho, spurs, bit, all are imported from England. . . Who enables him to purchase these articles? Who buys his master’s hides, and enables that master to employ and pay him? Who but the foreign trader. Stop the trade with foreign nations, and how long would it be before the gaucho would be reduced to the state of the Indian of the Pampas, fed on his beef and horse-flesh, and clothed in the skins of wild beasts?” (Bendaña, p. 34)
However, one important piece was missing from this jigsaw puzzle. Unless a modern railway system was introduced into the country, Argentine goods would be not as competitive with those of countries which could deliver beef, hides, and etc. to seaports in a much shorter time over rail rather than horse-back. Furthermore, unless workers and managers could make reasonably quick trips over rail between cities and rural points of production, the entire system would lack the kind of internal cohesion that other capitalist countries enjoyed. From the standpoint of classical economics, one would think that it would be to the mutual benefit of English and Argentine capitalist classes to develop a kind of partnership. Instead, what transpired has much more in common with the con games of the 1990s in which Wall Street banks got rich at the expense of the Argentine people. Except, in the 19th century, it was Barings Bank rather than Goldman-Sachs that was doing the robbing.
To look after its interests in this vastly ambitious railroad-building enterprise, the Argentine government named North American William Wheelwright as its agent. They were overly optimistic. After making the rounds in British banking houses, Wheelwright said in 1863 that a deal could be done only on the following basis:
–The land grant must be doubled (land adjacent to the tracks given free to the railroad company.)
–45 percent of the railroad revenue would be counted as working expenses.
–The profit ceiling would be raised to 15 percent, more than triple the norm.
–Most importantly, the expropriation clause would be eliminated.
Although the Argentine ruling class and its British partners were committed to liberalism in the economic sphere (the model for 1980s-90s neoliberalism), this loan-sharking deal had nothing to do with free market principles. Such concessions could only reflect the internal weaknesses of a bourgeoisie that relied on cattle ranching, as opposed to the British ruling class that had accumulated vast amounts of capital through manufacturing, and then finance.
When the shares for Central Rail, the new British-owned railroad, sold sluggishly, the bankers demanded further concessions. No longer would working expenses be limited to 45 percent, they would be *whatever the company accountants said they were*. So, not only do you get concessions forced down the throat of the Argentine government, you get an 1860s version of the kind of accounting that Arthur Anderson did on behalf of the Enron crooks.
To make sure that all the Central shares got sold, the British investors demanded that the Argentine government buy 2000 shares, which is a little bit like asking someone being hijacked to drive the truck. An Argentine Minister glumly commented:
We are faced with having to lower our heads for all these demands and any other ones that may be put before us given our nation’s need for the railway’s benefits and our own incapacity to secure these by any other means. (Bendaña, p. 93)
Finally, in the May of 1870, 17 years after the original conception and 7 years after work began, the first locomotive arrived in Córdoba. Over the course of the 1870s, the Argentine state provided nearly 40 percent of the guaranteed profits for the new railroad. In a nutshell, the wealth of the country was being drained to make sure that British investors enjoyed super-profits. Furthermore, the British enterprise was tax-exempt. This turned out to be a bonanza for the Central Argentine Land Company that came into existence in 1871. Unlike the railroad, commercial exploitation within land claim areas were far less risky and had no particular claim to the kind of tax-exempt status enjoyed by large-scale capital projects. Once again, the weak Argentine bourgeoisie had been given an offer that it couldn’t refuse.
With British technological superiority, one might at least hope that the new railway would provide adequate service. As it turned out, the Argentine people had ended up with a Yugo rather than a Rolls-Royce. Public complaints about service and rates grew legion.
Central was just the first in a series of white elephants. Next came the Northern, the Eastern, and the Great Western Railways, all financed by the British and all imposing larcenous penalties on the people of Argentina. A government audit revealed that the East Argentine railroad was marked by an excess of employees (exclusively English at high salaries), overly generous salaries for company directors, inadequate rolling stock, dubious accounting procedures, and bloated operating costs.
When such exploitation operates in open view, one might ask why the Argentine capitalists did not rebel. After all, if one is committed to national development, then one must allow oneself the ultimate weapon against foreign exploiters: expropriation. Unfortunately, except for the urban middle-class, such calls were not made. As is the case today, the dominant fraction of the national bourgeoisie lost its nerve. And like today, the ideological excuse for inaction was a commitment to the “free market.” The estancieros regarded their own economic well-being as synonymous with the extension of railway lines made possible by foreign investment.
When the harsh reality of British theft collided with the delusional schemas of the local bourgeoisie, voices of dissent began to be heard in parliament. Why couldn’t the nation redeem itself through seizure of properties that were based on criminality to begin with? Even the conservative “La Nación” asked in 1872:
Can and should the state build all railways itself and expropriate existing ones? We do not believe that the benefits of state railways should necessarily carry us to the latter consequence . . . Although the country cannot afford expropriation now or for many years to come, there may come a day when revenue and necessity may, possessed of means and facing a need for new lines, expropriation might become convenient. (Bendaña, p. 152)
Skilled as they were in keeping the natives at bay, the British turned to one defense after another. They bribed ministers, congressmen and railroad bureau officials to vote against nationalist legislation or to look the other way when laws were being broken. When this proved insufficient, the British were not above gunboat diplomacy. In late 1875, the British bank in Rosario suddenly demanded immediate repayment of railroad notes as part of a maneuver to destroy local financial competitors. When the nationalist-minded local governor in Santa Fe sided with his countrymen, the British sent their navy to blockade the city. Buenos Aires caved in to the show of force and the British won their demands without a shot being fired. Bendaña cites H. S. Ferns’s “Britain and Argentina in the Nineteenth Century”:
prosperity had created a nation of boosters, and the porteños (Buenos Aires elites) looked at the Governor of Santa Fe as Pierpont Morgan might have regarded William Jennings Bryan. (p. 258)
By 1913, Great Britain owned 95.8 percent of all private railways in Argentina. That amounted to 60.2 percent of total British investment in the country. The economic consequences on the nation were enormous. Arturo Castaño, a legislative deputy and rail expert, warned:
the more the railways extend themselves, the greater will be the economic disruptions, and the greater will be the migration to the cities from the provinces. A third of our national production is absorbed by the railways, without the Executive being able to intervene in rate-making due to an administrative system which favors the companies.
Indeed, when foreign capitalists absorb a third of national production, the question of imperialism has to be addressed.
The railway era lasted about a century. The first 3 decades, from 1830 to 1860, were a time of rapid expansion in the imperial centers. The spread of railways into Asia, Africa and Latin America did not produce concomitant benefits. Although Cecil Rhodes characterized railroads as “philanthropy plus 5 percent,” the profits were always far higher and the progress realized in countries such as Argentina was far less than advertised.
The reason that some nations are winners and some are losers does have something to do with institutions but only as the result of the relationship between them. If you see one guy walking around briskly and the other on crutches, you might want to see if there is a connection. If one is a mafia collector and the other is someone who owed a loan shark money, you might want to ask if the crutches are a result of getting hit in the knees by a baseball bat. At least, I would.
The authors are trying to figure out why Norway is 496 times richer than Burundi and look for explanations in the superiority of European agriculture, the tropical climate that allows parasites to flourish all year long, etc. Here’s a much better way of understanding the problem in terms of the baseball bat:
It is not without interest to observe that even then these leading British bourgeois politicians saw the connection between what might be called the purely economic and the socio-political roots of modern imperialism. Chamberlain advocated imperialism as a “true, wise and economical policy”, and pointed particularly to the German, American and Belgian competition which Great Britain was encountering in the world market. Salvation lies in monopoly, said the capitalists as they formed cartels, syndicates and trusts. Salvation lies in monopoly, echoed the political leaders of the bourgeoisie, hastening to appropriate the parts of the world not yet shared out. And Cecil Rhodes, we are informed by his intimate friend, the journalist Stead, expressed his imperialist views to him in 1895 in the following terms: “I was in the East End of London (a working-class quarter) yesterday and attended a meeting of the unemployed. I listened to the wild speeches, which were just a cry for ‘bread! bread!’ and on my way home I pondered over the scene and I became more than ever convinced of the importance of imperialism…. My cherished idea is a solution for the social problem, i.e., in order to save the 40,000,000 inhabitants of the United Kingdom from a bloody civil war, we colonial statesmen must acquire new lands to settle the surplus population, to provide new markets for the goods produced in the factories and mines. The Empire, as I have always said, is a bread and butter question. If you want to avoid civil war, you must become imperialists.
V.I. Lenin, “Imperialism, the Highest Stage of Capitalism”