Ichiro Suzuki Economists Daron Acemoglu and James A. Robison, from MIT and Harvard, published a book in 2012 that became a best seller. “Why Nations Fail” applied insights from institutional economics and development economics to understand why nations develop differently, with some succeeding in accumulation of power and prosperity, and others failing, via wide range of historical case studies. The authors conclude that pluralistic political institutions that allow all sections of society to participate in governing of the country, get its economy on track of growth on a long-term basis. Decisions always have to be made for the prosperity of the majority. Such a system of what they called ‘inclusive growth’ allowed prosperity with staying power amid shifting environment. Near the end of the book, in a section named “The Irresistible Charm of Authoritarian Growth”, the authors talk about limits of growth under authoritarian rulers. ‘Extractive growth’ stands in the opposite end of inclusive growth. Authoritarian rulers tend to employ the extractive system that benefits a narrow group of population primarily, by decisions made by a small number of elites who are close to the ruler. This system might bring prosperity, which can last for limited duration of time, but eventually fails to respond to changing circumstances of macro economic and technological challenges. The Soviet Union under Joseph Stalin was a case in point. Under 5-year plans, the Soviet economy took off in the 1930s, mobilizing its resources into heavy and military-related industries. Steel production soared and the USSR succeeded in sending a satellite into the orbit ahead of the United States. Shortly after Stalin’s death, some thought the USSR be on track to catch up with the U.S. not in the distant future, as Nikita Khrushchev boasted. Such predictions proved to be false. While the Soviet economy made great progresses in areas where top-down command approaches were effective, it hopelessly lagged in areas related to life of average Soviet citizens. Empty shelves at supermarkets were well known scenes about life under the communist regime. The economy needed to be guided by the invisible hand, not by the communist party elites. It takes creative destruction to dismantle success stories of yesteryears and put in place a new structure that responds to changing times. The authors argued that the Chinese Communist Party is essentially on the same path the Soviet comrades have followed decades ago. The CCP since Deng Xiaopimg has made remarkable strides in developing the Chinese economy, lifting hundreds of millions of people out of poverty. This astounding success was possible in part because China under Mao was a sheer disaster. With proper top-down planning and initiatives from Beijing, the country’s growth potential was exploited since the 1990s. However, the authors were still almost certain ten years ago that the authoritarian growth model would run its course and struggle to take the Chinese economy to the next level, to break out of the middle income trap. Ten years after “Why Nations Fail” came out, it looks increasingly clear that the two authors’ predictions on the Chinese economy are turning out to be correct. In 2012 Xi Jinping rose to the helm of the Communist Party, and is tightening his grip in every corner of Chinese people’s life, turning his country into an surveillance state. Xi is making his predecessor Hu Jintao look ‘liberal’. This section of the book starts with a story of Dai Guofang, who foresaw the future of the steel industry as well as inefficiency of state-owned steel makers. Dai tried to build a true steel giant but his project was stopped by order of the Communist Party. Then, Dai was arrested for reasons never clearly articulated. In retrospect, the offense he committed appears to have been challenging the CCP and state-owned enterprises. While Dai made an accurate analysis of the industry’s dynamics, he made a cardinal sin of making an attempt to defeat the Communist Party. Some 20 years later, history repeated itself. Alibaba founder Jack Ma overstepped in the IPO of Ant Financials, causing the wrath of the Party that made Alibaba postpone the IPO indefinitely. That turned out to be a prelude of the Parry’s wholesale attack on the country’s proud tech industry, which led to crushing loss of value for the industry, well in excess of a trillion dollars. The Party has to control everything, at any cost, even at the cost of prosperity of Chinese people. The only difference between Dai and Ma was that the latter was not arrested. Nonetheless, Ma has disappeared from the public essentially. The authors don’t subscribe to ‘modernization theory’, which argues that economic development delivers democratization. Presidents Bill Clinton and George W. Bush believed in this theory and invited China into the world trade system, including a WTO membership at the outset of the 21st century, assuming that China would become a responsible partner as the country grew richer. History, however, is littered with regimes of authoritarian growth turning even more repressive as the rulers tries to hold onto power. The authors brought up the cases of Germany and Japan leading to WWII. These two counties were already industrialized before World War I, something that authoritarian growth can achieve. Then, in the absence of solidly inclusive institutions both countries fell into the hands of militarists who halted all democratic processes and pressed hard on expansion into the neighboring countries, at the expense of ordinary people’s life. The rest is history. Authoritarian rulers don’t give up their power in a peaceful fashion. The more success they have with their policies, the harder it becomes for them to relinquish power. Both Germany and Japan had to suffer a crushing defeat in WWII, to have democracy fully restored. Since the book was punished in 2012, Xi’s China has become more control-mania, having built a police super state and aggressively bending the internet technology for political purpose to intrude into people’s life. In the last ten years, growth rate of the Chinese economy has dropped by almost 10%. This is a much sharper slowdown than the authors predicted in the book, though this was in part due to COVID-19. The sectors that drove China’s authoritarian growth have already been pushed to their limits, in exports, real estate, infrastructure investments and foreign aid. It takes creative destruction to revitalize the Chinese economy to boost growth outside of these already heavily used-up sectors. Creative destruction, however, is the last thing the Communist Party wants. Until recently, the CCP has offered economic growth and higher standard of living as a compensation for the Chinese people to accept their one-party rule. Now growth rate is slipping and that doesn’t mean the Communist Party is relinquishing their power. Quite contrary, the CCP is becoming more repressive. Though the authors did not mention in the book, a sudden decline of the Japanese economy’s performances since the 1990s is attributed to absence of creative destruction. After WWII, Japan is a vibrant democracy and has enjoyed inclusive growth. Nonetheless, economic growth has stalled, as an export-driven growth model has run its course. Decades of prosperity has built up massive vested interests, among voters as well as in industries. Vested interests are proving hard to dismantle, even in democracy. Or in a prosperous democracy, people don’t vote for a radical change and few politicians try to sell such a change. That said, a radical change can be possible through elections when voters are pushed to the corner, often by the financial market’s revolt or marked deterioration of economic performances. British people voted for a massive change at the end of the 1970s, and revitalized the economy. On the other hand, it might take a revolution or a civil war for an authoritarian regime to fall.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.