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.