Why Economic Backwardness Persists
28th November 2012
Why do some societies maintain institutions that cause economic backwardness? This is the vital question that MIT economist Daron Acemoglu and Harvard economist James Robinson asked in their seminal 2006 article, “Economic Backwardness in Political Perspective” in the American Political Science Review. Their analysis concluded that all too many rulers have clearly calculated that it’s better to keep their people in poverty than risk losing the privileges of political power.
Or, in the case of Democrats, reduce a previously prosperous people to penury in order to pursue progressive policies and, incidentally, promote their own privileges and political power.
The answer to this puzzle is what the two economists call the “political replacement effect.” As they explain, “Political elites will block beneficial economic and institutional change when they are afraid that these changes will destabilize the existing system and make it more likely that they will lose political power and future rents.” Rent in this case is the wealth that political elites divert from the productive parts of society to themselves via taxes, corruption, exclusive licenses, import restrictions, monopoly ownership, and the like.
In other words, Democrats.
However, innovation is stifled in those regimes where the elites are somewhat entrenched but fear replacement. In such cases, the elites calculate that economic liberalization might empower rivals and end up depriving them of the looted wealth their current political position affords them.
I’m thinking Congressional Black Caucus, here; New York being the poster child, but any major metropolitan area will probably do.