Why Nations Fail - Chapter 5 Review

Topics: Economic growth, Soviet Union, Communism Pages: 15 (5470 words) Published: November 30, 2012
Levisalles Amaury Georg-August-Universität

Sommer Semester 2012 Göttingen


Seminar Paper

CHAPTER 5 "I'VE SEEN THE FUTURE, AND IT WORKS": GROWTH UNDER EXTRACTIVE INSTITUTIONS What Stalin, King Shyaam, the Neolithic Revolution, and the Maya city-states all had in common and how this explains why China's current economic growth cannot last.


Resume of the Key Statements of the Chapter Description of the Original Researches used By The Authors Opposition to the Theories of Acemoglu and Robinson Personal Point of View Bibliography

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Resume of the Key Statements of the Chapter
In this chapter, D. Acemoglu and J.A. Robinson explain how growth under extractive institutions is not sustainable in the long term and always leads to the collapse, in one way or another, of these institutions. The title of the chapter, "I've seen the future and it works", is a quotation from the autobiography of Lincoln Steffens (1931). He was then speaking about the communist model that he had discovered on a diplomatic mission to Russia. The title of the chapter is of course ironic since it is well known that the Soviet System broke down in 1991. In this chapter the authors tackle different aspects of Extractive Institutions and explain throughout many concrete examples as to why the multiple facets of these institutions lead to the end of them. Extractive political and economical institutions are "structured to extract resources from the many by the few" and "concentrate power in the hand of a few, who will then have incentives to maintain and develop these institutions" (page 430). Dictatorship is the best example of an extractive institution as in this case power is concentrated in the hands of very few, if not only the dictator himself. These types of institutions are mostly founded in authoritarianism and totalitarianism political systems (dictatorship being an authoritarianism type of system). The Soviet Model is the first system studied by Acemoglu and Robinson in this chapter. It is indeed one of the best examples in history to observe how growth evolves under extractive institutions and the problems that rise along this type of political and economical system. After coming to power via a massive purge of his opponents, Stalin decided to invest massively in the industry sector through huge government orders, especially in the military and aeronautical sectors. In order to support all the needs of the workers, he implemented very high taxes on agricultural resources. However, the tax system in Russia at this time was very ineffective. He thus collectivized all the land to form state farms known as Kolkhoz. The incentives of farm workers were therefore much lowered since a large part of their harvests was taken away by the government. This led to a great famine during which six million Russians died (Davies and Wheatcroft, 2004). Even if the collectivization system was a total disaster, the growth in Russia still increased from 6% per year from 1928 to 1960, which at this time was a record. The growth happened through reallocation of labour and capital force. Indeed, the technology used at this



time in the country was really obsolete in comparison to Europe or the United States and only removing resources from agricultural to industrial work allowed Russia to benefit from very high growth for several years. However, rapid growth rate is one, if not the only possible achievement under Extractive Institutions. In fact, Russia's extreme growth slowed down from the 1960 and it had totally stopped by 1970. Unsustainable growth is explained by a lack of incentive for creative destruction, that means for technological change. For example, bonuses were given to companies meeting targets set by the government. Therefore, no one was eager to sacrifice resources to invest in future technologies since everyone wanted to reach...
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