Rules of the game
Landlordism is still with us
Nepali Times (Nepal)
13-19 May 2005
#247
BY ASHUTOSH TIWARI
Daron Acemoglu, a professor at MIT, was honoured last month with a John
Bates Clark medal. While a Nobel Prize is given out every December, the
Clark medal is rarer because it is awarded to an influential economist
under the age of 40 every two years. Through his research, Acemoglu has
attempted to shed light on the central puzzle of development economics:
what accounts for the wealth of nations?
Policy pundits have long hewed the usual `poor countries save less,
invest less on education and do not use technology’ explanations. Others
attribute it to variations in geography and culture. Still others,
citing North and South Korea as examples, say that what matters is
market-friendliness of a country’s institutions. Working with other
academics, Acemoglu has treated this last observation with rigour to
answer: how is it that countries end up with the institutions that they
have now and how big is the effect of such institutions on those
countries’ wealth? In doing so, he has put the study of institutions
right in the middle of economics and underscored the importance of
history, politics and legal systems in interpreting nations’ economic lives.
Acemoglu defines institutions as `the rules of the game in economic,
political and social interactions’. These rules refer to property
rights, contract enforcement mechanisms, limits on politicians’
excesses, distribution of political power and the like. What he shows is
that in many countries, these institutions have been set in place by
historical happenstances that responded to the then prevailing
incentives. For instance, even when the Spanish were in San Francisco
and Los Angeles well before the English traders, they could not be there
for long. Because they had to share the profits with monarchs in Europe
who controlled how much spoils the traders could keep for themselves,
they saw little incentive to hold on to their new land. Meanwhile, the
English pushed for property rights to stake claims on the New World that
the Spanish had first discovered.
Likewise, in Africa, death rates of their `bishops, soldiers and
sailors’ affected the settlement patterns of Europeans. That, in turn,
affected the eventual arrangement of institutions in African countries.
The logic is that in most places, high death rates discouraged Europeans
from settling down. As such, they set up institutions to siphon the
riches from those places to their home countries. As a result, at times
of independence in the `60s and the `70s, most African countries such as
Zaire, inherited those entrenched extractive institutions, which the
local elites kept in place to transfer resources into their own pockets.
But in places (such as the US and Australia) where their death rates
were lower, the Europeans settled down, cleared land for farming and
started demanding that their properties be protected by laws similar to
those of their home countries. Over time, those demands coalesced into
market-friendly `rules of the game’, positively affecting those new
countries’ economic growth.
Could an application of this `rules of the game’ theory help us
understand what is holding Nepali businesses back? Two hypotheses:
first, the Nepali state, though never a colony, has long acted as a
landlord – extracting surplus from villagers to pay for the elites’
indulgences. Reforms notwithstanding, that landlordism is still with
us – dulling Nepalis’ entrepreneurial zeal to innovate, produce and sell
anything anywhere with ease. And second, given that Nepal’s legal system
is a mishmash of Hindu jurisprudence, traditional rules, ad hocism and
western common-law statutes, Nepali businesses continue to find it
difficult to fit in with the global supply chain of goods and
services – credibly, competitively and for a long haul.