Arnold Kling  

Stuck in the Natural State?

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Antonio Fatas and Ilian Mihov write,


China has sustained high growth rates in recent years despite its poor institutions because institutional quality is relatively less important in developing economies. However, we find that as their incomes increase, such countries need good institutions in order to reach the income levels of advanced economies.

Thanks to Nick Schulz for the pointer. I could not help but think of the distinction that North, Wallis, and Weingast make between a limited-access order (or natural state) and an open-access order. Only when people outside the Communist Party enjoy political rights, property rights, and the freedom to form organizations will China be an open-access order.

Meanwhile, we'll see what happens in our own country. So far, since last summer a week has not gone by without significant new powers being transferred to Washington.



COMMENTS (7 to date)

What makes the Chinese case interesting to me is the fact that so much of their culture exists in a penumbra of the state -- there is not enough gov't infrastructure for state threats to be a useful deterrent against procedural (and in the farther geographical reaches, even substantive) violations. For example, there were still large families at the manchurian border, at least in 1998 whereas the one-child policy was strictly enforced in Beijing.

If the open-access state is an emergent phenomenon, then we might be surprised to see it emerge in a wholly different way than it did here.

Arnold Kling writes:

Michael, NWW think that is exactly how an open-access order emerged here--weak central control, and competition among state governments. NWW puts much less emphasis on the Constitution than does the conventional wisdom.

I'll have to read this book. I think agree with this idea up to a point, but want to hear more about how they deal with the issue of politically ambitious children of the incumbent elite. The history of the founding period suggests that competition among state governments wasn't going anywhere under the Articles until a federal arbiter was put in place by the Constitution. People forget that quite a few of those present at the Convention in 1787 had written several constitutions already and seen how those played out before sitting down to draft the one we still have today. How often can that experiment be repeated? But maybe it is in Iraq and Afghanistan right now.

david writes:

What does the NWW hypothesis say about open access in rich nations like Japan or South Korea, where government and key industries were typically driven by family-controlled conglomerates? The period under which Japan rose to become a economic power does not seem plausibly open.

It seems possible that a nation very much under a closed-access order can still enjoy rapid economic growth: minimal corruption and a growth-oriented political ideology seem to be the key factors. I think Bryan might have something to say about Singapore here.

Or perhaps it's a cultural difference?

fundamentalist writes:

I haven't read the book, but I tend to disagree that institutions aren't as important in developing economies. The Chinese have figured out how to get around the poor institutions in China. China is a unique situation. For decades expat Chinese have dominated the natural state economies of SE Asia where they have also been minorities without political power. Without access to government power, they were left with business as their only route to prosperity, but they needed some political power in order to protect their property from confiscation by more powerful natives inside the state. So they did two things. 1) They did business only with relatives or very close friends as much as possible and 2) They bribed state officials who could protect them from other predatory state officials.

You see a similar pattern among Christians and Jews in Muslim countries. Both groups flourished economically because they were kept out of the military and the government, which are the traditional Muslims routes to success. But they had to make friends with Muslims in power, usually through bribery, in order to protect their property. Still, episodes of mass murder and theft of their property by Muslims were regular.

Economic development within China has been carried out mostly by the expat Chinese investing in China and using the techniques they learned in other countries to get around the poor institutions of natural states.

Steve Roth writes:

Fatas and Mihov's chart seems to show that a certain amount of government (spending and hence taxation) is necessary to maintain those quality institutions and attain the highest levels of prosperity.

Not at all surprising: excepting Japan and (barely) Korea, there is no prosperous, thriving country (excepting perhaps some small city states) that taxes less than the U.S.

This chart says nothing about the government level at which that taxing and spending occurs (local, state, federal), or how it impacts the "quality" of institutions. But I would suggest that all the upper-right countries have a large concentration at the federal level.

I'll try pulling the OECD data to see if that's true.

What do NWW say, I wonder, of the French Revolution. Would NWW consider France a developing country compared to the colonies?

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