Arnold Kling  

Applying Douglass North, et al to Iraq and China

Another Reason Why Reading Eco... 90 Percent Lack Health Insuran...

In this essay, I elaborate on the new paper by North, Wallis, and Weingast that I first posted on last week. In the essay, I write,

I would say that there is no chance that the United States will succeed in its objective of establishing an open-access order in Iraq. The best we can hope to do is restore Iraq to a natural state, meaning a limited-access order where rights and power are exclusive to certain elites, who will be subject neither to economic nor political competition as we know it.

For a limited-access order to emerge, the leaders of each major faction in Iraq must have a stake in peace. For each leader, that means having enough exclusive economic and political rights to feel that he has more to lose than to gain by resorting to violence.

Like many commenters on my earlier post, I raise the issue of whether China is an anomaly, because of its relatively high level of economic competitiveness and low level of political competitiveness. I can see three possible outcomes:

1. China continued to open up and develop economically, while remaining a one-party state politically. This would tend to discredit NWW's paper.

2. China undergoes a transition to an open-access order, so that over the next 20 years genuine political competition emerges.

3. To retain power, China's leaders maintain control over the access to capital in the economy. Eventually, a system of centralization and government favoritism leads to economic stagnation before China achieves full economic development.

UPDATE: Frequent EconLog commenter Steve Sailer says in this essay

In America, you don’t need to belong to a family-based mafia for protection because the state will enforce your contracts with some degree of equality before the law. In Mexico, though, as former New York Times correspondent Alan Riding wrote in his 1984 bestseller Distant Neighbors: A Portrait of the Mexicans, “Public life could be defined as the abuse of power to achieve wealth and the abuse of wealth to achieve power.”

The quote from Riding about Mexico could constitute a succinct summary of what North, Wallis, and Weingast call a natural state. Sailer and I tend to disagree about immigration, for reasons that will be clear if you read his essay.

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COMMENTS (3 to date)
Steve Sailer writes:

It will be interesting to see if China follows Mexico's route of political development. After 1928, Mexico had a porous one-party system that was moderately open because dictators were allowed only a single 6 year term, allowing other elites to have a chance to claw their way to the top if they lived long enough. (This cut way down on the assassinations.)

The Mexican system outperformed the Chinese system, which was bogged down by Maoist ideological craziness, for the next 40 years, but in recent decades, corruption and violence among the Mexican elites worsened, while China, shedding Maoism, is coming on fast.

Hasan Jafri writes:

If we leave Iraq to a natural state -- which we likely will -- the only way for order to emerge from chaos would be through a geographical partitioning of the Iraqi state into three smaller states: One for Sunnis, one for Shias, and one for Kurds. This would not be all bad. Done right, it could ensure that the "exclusive economic and political rights" you talk about in your essay did indeed accrue to the leadership and the people of these smaller states. As things stand, conflicts among competing political and sectarian interests prevent this from happening.

That is why I believe the relevant economic model for Iraq would not so much be China or Mexico but rather Dubai or Qatar. State building on a smaller scale has been shown to be effective and less problematic than the far more complicated process of balancing interests in a large economy. When asked about the success of smaller east Asian economies, Deng Xiapoing famously said "If only I had just Shanghai to worry about."

I'm writing this at a Starbucks In Hong Kong, where I am spending the year away from my home in Seattle. Hong Kong was the late Milton Friedman's favorite economy, a tiger before there were Asian tigers, and a free trade model for the world to emulate. But this kind of prosperity (Hong Kong is very prosperous by any measure; it has some 2,000 more buildings 20 stories or higher than New York City) is manageable only on a certain scale.

Iraq has an opportunity. Sometimes, smaller is better. The Iraqis should divide the country, resolve their differences and replicate the successes of Dubai, Qatar and -- of course -- Hong Kong. Afterall, the shape of the Iraqi state, like that of many others, was the result of a colonial mistake, a line on a map drawn by a foreign bureacrat

Gary Shiu writes:

Actually China is not the only place where high level of economic competitiveness coexists with a closed political system. Singapore is another example. Other examples in Asia may include Taiwan and South Korea during their take-off years.

A more challenging question, beyond venturing a guess on how things would unfold in China 40 years down the road, is to ask how it got here in the first place

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