Inclusive institutions and economic development

Francis Fukuyama reviews Why Nations Fail, the new book by Daron Acemoglu and James Robinson, at his blog. The review is fairly critical. Fukuyama agrees that institutions are of paramount importance for development (as you would expect given his own recent book) but is unsatisfied with the vague (or even missing) definitions of the two central concepts of the book – ‘inclusive institutions’ and ‘extractive institutions’. This conceptual stretching allows the labels to be applied quite arbitrarily to fit the argument of the book.

In substantive terms the critique boils down to the question whether democratic (inclusive) institutions are necessary for stable economic development. In Fukuyama’s view they are not (think contemporary China) and might even be counterproductive (following Huntington). In Acemoglu and Robinson’s view, democratic political institutions and inclusive economic institutions are indispensible for sustained long-term development. Fukuyama’s quibble with Why Nations Fail fits into a line of argumentation he is in the midst of constructing which can be summarized as ‘good governance is necessary for development but democracy is not necessary for good governance’. His latest project, for example, is to develop a new conceptualization and measurement of governance which moves away from the traditional indicators of (Western-style) rule of law and democratic accountability. Here is a characteristic quote from the project’s announcement:

One can think of many ways in which greater democratic participation actually weakens the quality of governance.  

Acemoglu and Robinson respond to Fukuyama’s review at their own blog. But in my opinion Fukuyama’s general critique (and his smaller points about misinterpretations of historical episodes) remains. Irrespective of one’s normative convictions, one has to admit that economic development has been possible throughout history and space in the absence of inclusive, democratic institutions (unless one stretches the definition of democratic institutions to include 17-th century England or contemporary Singapore). Whether growth without political democratization is sustainable in the long term remains an open question (China).

Both Fukuyama and Acemoglu & Robinson focus on macro-level institutions but it is instructive to look at the meso- and micro-levels of institutions as well (taking the work on the management of common pool resources by Elinor Ostrom and others as a guide). In my reading, the message of this literature about inclusiveness, democracy and governance is the following: Successful management of common resources needs some form of participation and voice by the people within the community but also restricted access to the resource. Effective governance needs institutions that are inclusive for ‘insiders’ and exclusive for ‘outsiders’. For example, early community-based institutions for managing marine resources throughout the world provided for some influence by ordinary members of the community but at the same time they strictly defined who can and cannot fish and enforced these boundary rules. Of course, who is an outsider and who is insider is in itself a political question. And we don’t know whether these lessons from the micro-level generalize to society-wide institutions. 

Finally, although I remain skeptical whether democratic (in the narrow sense) institutions are necessary (in the strong sense) for economic development, the recent experience of Central and Eastern Europe (CEE) suggest a strong link between the two. Even for those with only cursory knowledge of the region would be clear that the countries that installed the most open, democratic and inclusive political regimes are also the most economically successful ones. In the early phases of post-communist transitions after the fall of the Berlin Wall many advocated economic development before political liberalization. In line with Fukuyama’s reasoning, it was feared that democratization prior to, or together with, economic reforms would impede development and lead to the implosion of these countries. Fortunately for the region, these opinions did not prevail and most of the CEE states initiated political and economic reforms simultaneously (in some cases with the additional burden of nation-building). Looking back, we can ascertain that those states which experienced the earliest and most far-reaching political liberalization were also the ones to achieve the greatest economic development (Poland, the Czech Republic, one hesitates to add Hungary). Whether economic reforms led or followed political liberalization or whether they were all predetermined by pre-communism legacies, political culture, etc. might be still an unresolved issue. Nevertheless, at the very least we can say that in CEE the establishment of democratic political institutions did not halt economic development.

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