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Ch. 1: So Close and Yet So Different

#126: Jan. - Mar. 2014 (Non-Fiction)
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Chris OConnor

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Ch. 1: So Close and Yet So Different

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Ch. 1: So Close and Yet So Different
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heledd
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Re: Ch. 1: So Close and Yet So Different

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I've liked this book from the start. The authors begin with the divided city of Nogales. The north is in prosperous US, and the south in Mexico. The difference in living standards cannot be attributed to geography, climate, or differing culture and background, but by their differing political institutions. I'm amazed its taken till now for this book to be written. It would make no difference to advise politicians to read this book as their primary purpose is to retain enough popularity to be reelected. When Gorden Brown, our ex chancellor vowed to increase the money given to Àfrica, I thought hè was crazy. Why would he think that the money would ever benefit poor Africans
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Re: Ch. 1: So Close and Yet So Different

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In the preface, they mention different explanations for why countries such as Egypt are poor and say "the one dominant among economists and policy pundits, is based on the notion that the rulers of Egypt simply don't know what is needed to make their country prosperous..."

This does not seem like the dominant view to me, and this view would be almost ridiculously naive. I think they're making out their thesis to be more original than it really is. Nearly everyone knows that political elites rule in their self-interest, and are not just mistaken about policies. I think the dominant view is essentially theirs, that "institutions matter." It is certainly mentioned in basic economics textbooks. The only question is how much other factors also come in to play, I think others such as Jared Diamond would want to make geography a bigger factor, for example.
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Re: Ch. 1: So Close and Yet So Different

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Dexter wrote:The only question is how much other factors also come in to play, I think others such as Jared Diamond would want to make geography a bigger factor, for example.
Since many of us are familiar with Diamond's book, I'm sure we'll be referring to it frequently. The quote below might be useful to keep in mind.
I believe the Site listed will take you to a more expanded description of Diamond's views.

Here is Diamond’s bottom line:
My overall assessment of the authors’ argument is that inclusive institutions, while not the overwhelming determinant of prosperity that they claim, are an important factor. Perhaps they provide 50 percent of the explanation for national differences in prosperity. That’s enough to establish such institutions as one of the major forces in the modern world. Why Nations Fail offers an excellent way for any interested reader to learn about them and their consequences. Whereas most writing by academic economists is incomprehensible to the lay public, Acemoglu and Robinson have written this book so that it can be understood and enjoyed by all of us who aren’t economists.
- See more at: http://marginalrevolution.com/marginalr ... UA0r0.dpuf
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Re: Ch. 1: So Close and Yet So Different

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I'm a little skeptical so far about the accuracy of the historical analysis, considering that the authors characterize the Spanish Armada as "an attempt by King Philip II of Spain to invade England." Not sure whether it's just indicative of poor writing or whether it could indicate a lack of depth that can transfer to the analysis by through things like conflating correlations with cause and effect or trying to impose a pattern where there is none.

I was also surprised by the lack of explanation behind the fact that the Spaniards conquered the natives and were able to put them to work, whereas the English were unsuccessful at doing so. In the podcast, Acemoglu is actually pressed on this issue and adds, in concert with his interviewer, that the South American natives were organized in hierarchical structures and wouldn't leave, whereas the North American ones were able to escape towards the frontier. There is also the fact that the population density in South America was much higher than in North America, leaving little room to escape. This would point to more important roles played by culture and geography (in the first case), or by geography alone (in the second case.) The same issue comes up when they contrast the inability of de Solis to conquer the Charruas people, who lived in "small groups without strong centralized political authorities" and Mendoza's success in accomplishing this with the Guarani, who had an aristocracy and a system of forced labor already in place. Where does the boundary between culture and the political institutions it bolsters start and end?

Could there also be a chicken and egg problem in their explanation? If South American colonial society was based on extracting first precious metals and then labor from a subjugated population, wouldn't that suggest that it is the prevailing economic interests that led to the political structure (the typical Marxist view) rather than (or at least as much as) the other way around?

Anyway, I look forward to the rest of the book and the discussion. Also, is it just me or does it seem kind of lacking in numbers, for an economics book?
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Robert Tulip

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Re: Ch. 1: So Close and Yet So Different

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Chapter One correctly explains that institutions of governance are the primary driver of economic growth.

I disagree with their critique of Jared Diamond's geographic determinism in Guns, Germs and Steel. It is interesting to ask why democratic accountability and transparency arose in Anglo Saxon countries and Northern Europe but not elsewhere. Europe conquered the world using the advantages conferred by geographic circumstances, including the arms races impelled by the existence of roughly equal sized nation states, combined with cold weather forcing innovation in planning, management and technology.

Why Nations Fail? explains that even the British tried to impose corrupt rentier states, for example in Maryland, but failed because the colonial environment of British settlers could not stop democratic involvement. On geographical determinism, it looks like a main difference between north and south of the Rio Grande is that the institutions of the USA were created in a competitive cold climate, whereas the institutions of Mexico were created in a corrupt hot climate.

This doesn't mean we have to be fatalistic about poverty as inevitable though. The authors refer to the "manana" culture, meaning a lazy attitude of putting everything off until tomorrow. Such ideas are rather wildly unacceptable these days, but this song sets out how it was viewed a few decades ago.



On the question of aid policy, the need for institutional reform as a primary means of ending poverty is far from generally accepted. The "Make Poverty History" campaign by NGOs appears to accept the "wealth transfer" premise that if only the rich were more generous, poverty could end. My view is that aid needs a much more rigorous division between humanitarian and developmental funding, and much stronger analytic foundations of the sort discussed in Why Nations Fail?. Helping poor people, especially in emergencies, is a humanitarian need. But this does not help end poverty, since transferring wealth entrenches existing power relations.

Ending poverty requires transformed institutions, stopping corruption, enforcing property rights, formalising the labour market, encouraging contestability and innovation in ideas, and applying sound and predictable regulation for business. This sort of cultural change is difficult but not impossible, and rests primarily on cultivating developmental leadership.

One thing I really liked in this chapter of Why Nations Fail was their description of the origins of the extractive state. Making conquered kings fill rooms with gold and silver and then killing them anyway is a recipe for extreme polarisation, hatred and distrust. This heritage of European plunder and cruelty helps to show why extractive industries are viewed with such hostility by many poor people around the world.
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Re: Ch. 1: So Close and Yet So Different

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Sorry I have so little net here, and cant access my notes. I agree with you about transforming institutions, Robert, but its not so easy. For example, this year we had vat imposed, and everyone has to pay a tax on their small businsses. This is from World Bank advice. So we had two thriving markets at our village, where local ladies could get together and other ladies could find everything they wanted in one place. Then it was announced that they had to pay 500 dalasis a year for this (about £10) most of the ladies only make very few dalsis, enough for their 'fish money' and the net result has been that the markets have been abandoned, creating more hardship for the locals. Also many other shops in the main market of Serrekunda have closed.
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Robert Tulip

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Re: Ch. 1: So Close and Yet So Different

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I should say, my interest in this topic arises from working for the last 25 years for the Australian Government overseas aid program, mainly in Papua New Guinea, but more recently on a range of sectoral topics including mining, forestry, agriculture, roads, banking, private sector development and university research.

Heledd, I think your example illustrates well how external theorists can fail to understand the reality of a local economic situation. Small businesses in poor countries are extremely fragile, and need help if they are to grow. I personally think that support for business development services, helping small businesses grow into medium businesses so they can provide more jobs, goods, services, customers and models, should be a bigger part of international development. Imposing formalisation through tax can be a blunt instrument that can actually reduce government income and economic activity if badly handled.

People may have read Confessions of an Economic Hitman by John Perkins. It explains how a lot of World Bank advice has not been good. These problems of institutional reform are hard.
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Re: Ch. 1: So Close and Yet So Different

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I have downloaded it, Robert and will read it wih interest, if I can manage to charge my tablet. At the moment we have a diesel and petrol shortage here
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Re: Ch. 1: So Close and Yet So Different

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Robert, I just finished reading that download, and thought it awesome and depressing. I thought at one stage it MUST be fiction, but everything made sense. Made me rethink my view of the world
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