Beijing’s success is a conundrum for Nobel winners

By Mihir Sharma

Twenty-five years ago, economics was in a crisis even if most economists weren’t aware of it. The discipline was slipping away from answering big questions, the sort people really cared about. As Noam Scheiber pointed out in a New Republic cover story in 2007, the conventional wisdom was that “the path to knowledge lay in solid answers to modest questions.”

But, at about the same time, Daron Acemoglu, James A. Robinson and Simon Johnson were tackling the biggest possible questions: Why do some countries succeed, and others fail? One worked in an academic economics department, one in political science and the third in a business school, and the answers they came up with lay between all those disciplines. They weren’t “solid” answers, perhaps – you can poke holes in many of them, and many of us did. But their questions weren’t modest, and that’s what counts.

When I was first introduced to the paper that became known by their initials — “AJR, 2001” — in a stuffy Cambridge seminar room 24 years ago, that ambition stood out. Why were countries that were rich in 1500 poor today, and vice versa? Their answer was, for better or worse, “institutions” — the constraints that are imposed on arbitrary power, the way interest groups share the exercise of power, the protection against expropriation, and so on.

Some institutions were designed to be extractive, to maximize revenue for an elite or foreign minority while not serving the interests of the broader public; others were more inclusive and dynamic. According to the neo-institutionalist school that kicked off with AJR 2001, only the second kind worked.

Acemoglu and the others managed to argue, even in the relatively conservative world of economics graduate school in the 2000s, that colonialism had long-term perverse effects, that minority rights mattered for growth, and that the sole fundamental reason for the underperformance of African nations was past exploitation. You can hold your past responsible for your present, but it need not shape your future.

These were controversial arguments then, and to an extent still are. And their answers were remarkably optimistic by the standards of the dismal science: There was nothing special about the West or America that could not, with the right reforms and the proper institutions, happen elsewhere in time and place.

Certainly, some of these questions, about colonialism, or Africa’s under-performance, are still being asked. But what struck me, reading reactions to their well-deserved economics Nobel this week, was that the largest question of all — what makes countries rich? — is not really one that is asked as much any more. It is no longer considered to be much of a puzzle.

There is a simple reason for this: The rise, over the past two decades, of the People’s Republic of China. Some other nations — India to an extent, some in Southeast Asia — have also grown in this period. Only China, however, has seemed to move inevitably toward becoming wealthy the way the question would have been posed in the 2000s.

But China’s very success has knocked a hole in both the ambitious question the institutionalists asked, and in their preferred answer. The question is no longer asked seriously, because we think we know how countries can get rich quick: Be like China. And how can decent, inclusive, supportive institutions be so important when it is Beijing’s repressive state capitalism that has triumphed over the past two decades?

The institutionalists have something of a reply, of course: China’s growth “was a result of policy and institutional reforms.” The dilution of the Communist Party’s hold over the economy in the 1980s, the limited protections granted entrepreneurs, and the meagre independence carved out by some provincial parties was sufficient for growth to take off. If they are right, then the end result of the clampdown on political and economic freedoms under China’s current leadership will be a long-term slowdown in growth. Indeed, in 2012, Acemoglu predicted that Chinese growth would fizzle out “as the country reaches income per capita levels around 30-40% of that of the US.”

But there’s no getting away from the fact that the institutionalists’ comparative argument is no longer as persuasive. Chinese institutions are far more extractive than those in many of their peer nations, which have not done quite as well.

What stands up better is the negative, rather than affirmative part of their argument: “Growth did not occur because the culture of the Chinese changed, or because some geographical constraint was lifted … but because the political equilibrium changed in a way that gave more power to those who wanted to push through reforms.”

I don’t know whether all the answers Acemoglu, Johnson and Robinson provided will stand the test of time. What matters more to me is that they restored a certain breadth to economic inquiry. And, certainly, I hope that whatever the right answer turns out to be, it is as optimistic as theirs. China’s case proves, they argue, that “there is no intrinsic reason why Mali is poor, and it is possible to make its citizens rich.”