Reading Snippet - Why Nations Fail (9)

Why inclusive societies could emerge

The authors had expended large sections of the book on examples from North American colonies, Australia, Great Britain, France and Japan on how they attained inclusive societies and maintained it. Be it revolution (France), threat of low productivity among the commoners (North America and Australian), mutiny amongst the wealthy (Great Britain) or threat of sub-ordination by another world power (Japan).

The mechanisms played out in history may differ across nations, but there seems to be an underlying common link - the realisation that you either replace the incumbent as the next exploiter that extracts from a dis-incentivised base, or open up incentives to the masses by giving equal rights & obligations, so that all citizens enjoy greater power & prosperity and you dwell as one of them.

The former is a classic pre-industrial setup all too familiar in Chinese history, in which a small group of elite would overthrow the previous tyranny, set up 'good government' which distributed land and created a not-so-corrupt administration system. However, as time went, the political power would be translated into economic power in the form of monopolies (rice export, salt production & trading, wine-making & sales) while large landowners emerged and forced tenants into serfdom with the blessing of the government (the government officials were large owners themselves). The political and economic elites joined force and was preserved at the top, and factions started to fight against each other to get into that prized position. Then history repeated itself.

The latter is a recognition that either power is concentrated amongst a few and warfare ensues, or the power become more distributed and everyone is better off. This is exemplified in the Australia case - the British authorities could have exploited the prisoners by forcing them into hard labour without pay, or allow them to finish their compulsory work and then do extra fee-earning work with their 'free time'; prisoners could also own properties bought with their savings. The first scenario is analogous to a small elite (the local government) assuming great power, which would lead to low productivity among the masses and potential rebellion down the line; the second scenario (which the government eventually chose) is closer to inclusiveness and equal opportunities for all inhabitants.

This transformation in mindset is significant. If power is absolute and concentrated amongst a few, those few have little incentive to conduct creative destruction which is a risky affair - you may experiment with destructions without bearing fruits, or creative destruction may come from the masses and you become deposed. Why not enjoy the current cushy lifestyle when the others are doing the work for you? There is also little incentives among the masses as any gain would only be expropriated by the elites, so why try so hard? The hardest they would ever try was to topple the elite and replace them.

When power is centralised but not absolute (checks & balances in place and participation from everyone) and the distinction between the powerful 'elite' and the powerless and exploited 'masses' is busted, then there is no such thing as 'topple & replace the elite'. Economically, the moving away from 'absolutism' refers to the ability for citizens to enjoy the fruit of innovation or experiments - if you invent a new machine, you could profit from it; if you find a new way to farm, you could keep the extras. This gives incentives to the previous 'masses' to improve, while the previous 'elites' suddenly find that despite their loss of economic dominance over the 'masses', the greater incentives mean economic improvement and  a 'bigger pie with smaller share' which gives a bigger slice.

The former elites may have lost 'power' with the transformation, but they can also do away with the threat of being toppled; meanwhile, the 'power' is now un-entangled from economic benefits (no power, but bigger slice of the pie) and so incentives for elites to hold on to power just to protect their wealth.

In Australia, the officials realised that exploiting the prisoners to enjoy all the fruits of a small economy was inferior to opening up the rights so as to enlarge the economy and enjoy a smaller share of outcomes. When the Spaniards arrived in South America, with the wealth of precious metals and sizeable indigenous population, their calculation was different - the existing economy was large enough to live a comfortable life through exploitation, and so they did not hesitate to enslave the masses and condemn them to hard labour.

Reading Snippet - Why Nations Fail (8)

How to create a modern extractive state

To illustrate how vulnerable the modern inclusive states are to a reversal of fortune, the authors raised the example of South Africa.

When slave trading was made illegal, the African colonial governments encouraged the locals to turn to farming and manufacturing as a substitute. Education was encouraged and property rights were reformed so that the locals could privatise lands from collective tribal ownership. The policies went well and the local community started to thrive through more productive private lands, skilled workforce and entrepreneurship. The impact was direct competition to the white community in skilled work, rising costs of unskilled work (as supply decreased) and lower prices fetched for merchandise as supply increased. This posed issues with the white settlers - their farms were not as profitable, while their mines could not operate cheaply.

To resolve these two issues, the white government decided to create a two-tier society, allowing the white settlers to extract from the local communities. To achieve this goal, policies were implemented to push the locals from prosperity to subsistence. Education was banned (except for elementary education so that they had the basic skills to survive) and land was confiscated and re-distributed to white settlers. The black accounted for 80% of population but was only given 20% of land, which was barely enough to keep people alive. Furthermore, property rights was discouraged and the land reverted to tribal ownership which lessened incentives to improve productivity. The locals were not allowed to operate business in the 'white' land while any service provision could only result in wage but not dividend or productivity-related bonus.

These policies had a string of impacts - the locals were forced to leave their land and seek employment in the white areas, but they could only work in the unskilled sector. This means there is a burst of supply of unskilled labour, suppressing their salaries. They could only earn productivity-unrelated wages and so their incentive to produce was lessened, justifying their low wages. For any black lucky enough to accumulate a small fortune, he/she could not set up business in the more profitable white area and could only sell to the blacks, meaning a low return on capital and thus low incentive to invest in entrepreneurship. Overall, incentives to participate in creative destruction or to invest productivity were wiped out. They were therefore condemned to poverty.

The main message of this story is that governments do not need to enslave the population out-right to be extractive. They can create a set of economic policies that alters people's incentives, thereby moving them from investment & creative destruction into low-incentive subsistence lifestyles. People are not poor because they are lazy, they were forced to be lazy as industry & creativity would only lead to fruitless outcomes.

Reading Snippet - Why Nations Fail (7)

How to prevent inclusive political and economic institutions from emerging - a historical perspective

It is often observed that successful nations are concentrated in Western Europe, North America and the former white settlements, whereas previously fertile nations in the Middle East and Asia have failed and Africa had struggled to be successful from the start. Instead of blaming it on culture or climate, the authors offered a powerful alternative criticism to the West.

They noted that prior to European trades, Asia had been commercially active as the Asia and Middle Eastern merchants exchange silk, china, grains and spices. However, as the Europeans joined in the trade and faced competition from other European companies or Middle Eastern traders, their intention to monopolise these profitable trades resulted in local warfare, taking over from local rulers and forcibly closing the markets or demanding locals to cultivate the spices and selling at low prices. The result was the imposition of extractive political & economic institutions (the natives were next to being enslaved) or causing the local rulers to withdraw from market economies (e.g. closing down their own markets or demanding their own farmers not to plant spices lest they would attract the Europeans' attention) which removed their chances of moving from primitive institutions towards modern institutions in the way European states could.

The Africa story was more heart-breaking. As the plantations in the Caribbean developed, demand for slave went through the roof and some African local polities started to profit by capturing other Africans. As these polities grew rich, they organised themselves into centralised administrations with the sole intention of attacking other tribes and selling the tribesmen as slaves. As a result, these administrations were highly extractive in nature with power concentrated among the few leaders who organised the raids and shared the spoils, without any intention of developing their own sustainable economy. As these polities were military in nature, coups and internal unrests were common as different factions tried to control the leading positions. On the flip side, the weaker tribes that were attacked had to withdraw from fertile grounds into the geographically difficult areas to avoid further tragedies, meaning that they lost the ability to develop their own economic institutions. For some polities that did not attack other tribes, their leadership instead sold their fellow citizens to the Europeans, by making every minor crime punishable by slavery, or by fabricating oracles to legitimise the sending-away of believers. These administrations gradually evolved into extractive institutions through slavery.

These two sets of examples serve to show that when states are affected by extreme historical events (economic warfares and slavery), there will be perverse incentives that can cause them to develop highly extractive institutions or institutions that are withdrawn from potential evolution towards inclusiveness. It is not just their internal setups and internal affairs that would decide their subsequent institutional developments, but also external or international events. The next time we discuss why Africa has not evolved into inclusive states, we should understand that the Europeans should shoulder as much blame as the Africans themselves.

Reading Snippet - Why Nations Fail (6)

Why nations' political and economic institutions diverge so much? The 'critical junction' explanation

While the archaeological and historical perspectives explain why political & economic institutions are necessary in human society and why the institutions diverged between states over time, they did not explain why they diverged so much over a short period of time.

To be precise, people found that Western Europe and North America developing a break-neck pace after the middle ages, breaking away their similarities with South America or Eastern Europe. To account for this, the authors introduced a complementing idea called 'critical juncture'.

These junctures are created by historically impactful events, such as Black Death or de-colonisation. During these events, there are extremely strong interactions among all affected parties, allowing deep changes to be made over a (relatively) short period of time. These junctures are not 'short' in an absolute sense, but in a historical sense. De-colonisation unfolded over the course of half a century, while Black Death's juncture lasted 2 centuries.

During a juncture, it's not just the accelerated interaction frequencies that caused significant divergences, but also two other factors. First of all, the differences in the pre-existing political and economic institutions would be magnified in setting the permitted interaction options, and given the many more decisions that were made, the magnification would indeed generate greater divergences like a 'multiplication factor'. A cited example is Black Death, in which a strong market culture (bigger and more independent towns compared to rural areas) and weaker monarchy in the UK allowed it to steer the institutions to become more inclusive, whereas in Eastern Europe the diminished rural workforce simply allowed landlords to be more extractive over the remaining population.

The second is the more volatile interactions - by definition, these junctures are triggered by major historical events, meaning that the arena in which the interactions unfold are very different from the previously more stable environment. This is likely to give power to a previously quiet force and vice versa, leading to greater likelihood of interactions that are towards the extremes of the option spectrum or that the option spectrum differed entirely from one interaction to another. In short, this simply means that each interaction point forces great divergence instead of allowing small, incremental changes.

As these junctures play their courses, the states will not just look very different from how they were at the start, but also very different between one another.

Reading Snippet - Why Nations Fail (5)

How political and economic institutions develop - the historical view

From the archaeological view, political and economic institutions are the necessary setups for human societies to develop. How the different states developed distinctively different institutions and why some became extractive and some inclusive could be explained by the historical view.

Under this view, at each point along the historical axis, different parties are trying to influence the political and economic institutions. There are also indirect historical events unfolding that would open up or set options for the state to take (e.g. the migration of tribes from the Stepp towards Western Europe). As the parties interacted and certain options were realised, this would shift the political and economic institutions' shape, and gradually evolve into their historical or present shape.

A number of fine points to note here. First of all, most of the interactions & decisions are small steps that would affect the next set of available interactions or decisions. For example, if decision was made to end monopoly, then the next set of actions could be to re-introduce monopoly, or to maintain free market. Another point is that decisions & interactions could reverse progress, e.g. medieval Venice went from partially inclusive to being extractive during the 13th Century. This leads to the third point that the impact is not 'cumulative' as in inclusiveness would accumulate through a string of historical interactions or vice versa; instead, it should be viewed as 'Brownian motion' in which the historical timeline has numerous interaction points which affects the setup of the institutions and influences what the institutions could look like at the next interaction point.

What this also means is that even if two states look very similar initially, the small differences at their starting points could affect the set of options available to each state and result in divergent paths. Also, even if two states were extremely similar at the start, the small interactions taken at each point could lead to gradual divergence as the possible options became more and more different as decisions were made.

Reading Snippet - Why Nations Fail (4)

How political and economic institutions develop - the archaeological view

Having outlined the concept of extractive vs. inclusive institutions, the exploration now turns to why some countries developed inclusive institutions while the others are stuck with extractive institutions.

From an archaeological standpoint, human  civilisation only developed after some form of centralisation was possible. Like all animals, the initial human lived as hunter-gatherers, and rules and rights were primitive - if you do not agree, you simply break off the group and wander away. However, as human spotted fertile fruit trees and good hunting grounds, especially during the 'long summer' in 10,000BC during which warm climate allowed an explosion of plants & animals, human started storing surplus and identifying good spots, making settling a viable alternative to nomadic lifestyles.

The move from nomadic to sedentary lifestyle was not an easy transition, requiring the creation of additional laws & rules (such as mentioned above, property rights and how spoils should be divided) not necessary for nomadic lives, and then administer the rules and maintain order by resolving any arising conflicts from the created law & ensuring the resolutions were enforced. This required centralisation of power, i.e. a small group of powerful people among the nomadic group to set and enforce the sedentary-favourable rules, and then use the power to coerce or persuade the entire group into the new lifestyle.

With this centralisation of power for the purpose of rule creation, conflict resolution and rule administration, a political institution had been effectively created. With these political institutions, economic decisions for the benefit for the society (and elite) could be arrived at and enforced, e.g. creating new settlements, trying out agriculture, domesticating animals, taxing all spoils in preparation for lean years. Starting with political institutions, economic institutions were next created which were heavily controlled/influenced/dependent on the political institutions.

In short, when economic opportunities presented themselves (the Long Summer), effective exploitation depended on some centralisation of power to allow effective development of principles/method/structures/processes (changing from nomadic to sedentary lifestyle), leading to political institutions. With political institutions, economic institutions could then be created as a result of using the centralised power in designing the economic principles/methods/structures/processes to exploit the economic opportunities.

Work snippets - the builder's metaphor

The Builder's Metaphor - my interpretation of what it means

I attended a company workshop some weeks ago on next year's strategy, and unsurprisingly one of the participants raised the 'three builder metaphor'. One of the favourite metaphors of all times, which goes as follows:

There were 3 builders working on a cathedral site back in the middle ages. The bishop walked by and asked: what's in you mind? The first builder replied: "I am thinking how to lay the bricks". The second replied: "I am thinking how to complete the wall". The third replied "I am thinking how to complete a cathedral". The first builder ended up laying bricks for his work life, the second become a good site supervisor, while the third climbed the career ladder and became an architect masterminding many great buildings.

The wisdom from this metaphor - be the third builder, think about the vision and the long term.

It's an easy metaphor with a nice wisdom, one which you feel you understood immediately and could retell to other people with ease. Nonetheless, I used to struggle to apply the wisdom at work or in life. What does it ACTUALLY MEAN "be the 3rd builder"? What are the changes to our principles, thinkings and actions? What is it like to mind the vision? If everyone is like the third builder, wouldn't productivity collapse? Easy to say, hard to enact.

After spending time in different industries with different job roles, I am starting to GET the meaning (maybe). I started to notice that a lot of colleagues focus on doing work without prioritisation. They are not in the pure processing job roles (e.g. cashiers, letter sorters) whose jobs ARE to perform certain processes in the same way as the first builder's brick laying. They are software engineers, yet their pure incentives is 'I have completed this engineering requirement as per spec'. Is this part of the spec top priority? Did you complete it with the deadline in mind? Is the engineer quality 'good enough but not much time spent' or 'perfected by spending lots and lots of time'? These are not questions they have in mind. They are viewing their role like the first builder - I have DONE my work and here is the output, now let's go home.

Then there are colleagues who are thinking the above question, and so their work is prioritised, the deadline pressure is felt & responded to, and more thoughts are put into the trade off between time and quality. They are like the second builder, and they are saying 'I have DELIVERED the project as per requirements, now let's go home'.

Finally, there are colleagues who are are thinking how other projects or other divisions in the company would be affected as their project is delivered. At the same time, they are thinking about whether people are developing themselves and how the team culture is unfolding in the process. Alongside their project delivery work, their own teams and other teams are co-ordinated and elevated in the process. They are saying 'I have DELIVERED A STATE CHANGE for the company, now everyone can feel better'.

The different between the first and second builder is obvious to a lot of people - 'doing' is good, but 'delivering' as per requirements and constraints is even more important. The difference between the second and third builder is more obscure - it is about recognising that what you do have an impact on other components in terms of other projects and in terms of teams' culture and personal development, and account for that when planning.

Now that I have an interpretation, I will try to act like the third builder. It's not about 'let's talk about grand visions', it's about arranging your work to allow grand visions to be realised

Reading Snippets - Why Nations Fail (3)

Why Extractive States can still have some initial growth

The authors' had no intention of acting against scores of historical cases that showed growth amongst extractive states - Soviet Union, Maya city states, Communist China, South Korea under dictatorship, to name a few. The key point is that those growths could arise but could not last.

Extractive states got into the situation first by forming a centralised political environment - a small group of people could command or coerce the rest of the population into submission. This allowed them to organise some form of law and order, and also allocate the state's resources and enforce the allocation. With such political power, there are two ways to grow - by 'arbitraging' the resources from low productivity, or by allowing limited inclusive economic activities.

In 'arbitraging', the people and resources engaged in low productivity activities like farming could be switched to high productivity activities such as heavy industries, utilising foreign technologies. But once the state has completed the switching, it often struggled to develop momentum in upping the productivity in these 'high productivity' activities, or there would be resistance in introducing newer technology - when people were coerced into switching industries, the coercion metrics would normally focus on forcing people to maximise their working hours and penalising failures. These discourage workers from taking any risk in experimenting new methods of trialling out new technologies; the downside risk is simply too severe.

In allowing limited inclusive economic activities, this is usually predicated on having a strong grip over the state, such that the elites need not fear some people getting rich & powerful and overthrowing the elite class. An example was South Korea, which with US' support could sustain dictatorship with little fear. They would allow people to conduct economic activities, and reap benefits through taxation or having a stake in those activities.

As mentioned earlier, the human intervention that generated these growths also intervened to stifle sustained growth. Incentives for the population to innovate is low, while the elite would resist new innovation for fear of their own political & economic powers being harmed. Creative destruction was removed and inefficiencies would stay when the rest of the world moved on. Finally, these states may 'fail' as the elite fought against each other to attain the 'top' profitable position.

Reading Snippets - Why Nations Fail (2)

The Political & Economic Institution Theory

After denouncing the other theories, they raised their own theory - nations fail because their political and economic institutions are set up for failure.

The crux of the theory is that there are broadly 2 types of institutions - extractive institutions designed by elites to squeeze profits for themselves and no one else, and inclusive institutions that give the general public a chance to succeed and participate in political and economic activities. Extractive states do not allow sustainable economic growth and will eventually fail.

The political and economic institutions are intertwined - political institutions define who become powerful, and the power will be used to steer the economic institutions; in turn, the economic institutions determine how the economy will be run.

There are 2 keywords in this theory - 'pluralistic' and 'centralised'. The institutions should be 'pluralistic' so that multiple players can compete and do not monopolise the power or economic benefits. At the same time, the political institutions should be 'centralised' so that each institution has enough authority to enact policies, instead of hitting impasse every time a decision needs to be made & executed.

The main cause for extractive states to not have sustainable economic growth is down to two reasons. First of all, when political and economic powers are concentrated such that a small elite could reap all the benefits, there would be in-fightings to compete for the podium position. These fights would lead to state failure.

The second reason is the lack of creative destruction. In inclusive states, pluralism allow competing parties to adopt new technologies and embrace knowledge to capture the market. In the process, old technologies and poorly organised parties are pushed out. Productivity improvement is sustained. On contrary, extractive states are inclined to keep the status quo so that the power of the elite and the setup of the institutions will not be challenged. Innovations are discouraged and uncompetitive parties are not phased out. The result is a backward state that could not grow