Daron Acemoglu and James Robinson write,
Were the economic prospects of North Korea, which shares the same Korean culture of course, not just as bright until the economy became enmeshed in collective ownership and central planning which destroyed incentives and opportunities? As we discuss in Why Nations Fail, this example is telling. North and South Korea had the same culture when they were divided but very different institutional structures were created in the South. It is of course not culture that explains South Korea’s success but institutions.
Do cultural habits dominate formal institutions or do formal institutions dominate cultural habits? I do not have a settled view on this issue. I agree that the Korea example argues for formal institutions. However, there are other instances that seem to go the other direction. Why is democracy apparently working out so poorly in many places, such as Iraq? Why does average national IQ serve to predict economic outcomes?
Paul Romer’s project to set up charter cities makes sense if you think that formal legal institutions are the differentiating factor. If he is right, you can set up a city in, say, Honduras, with the legal structure of Hong Kong, and over time the economy in the Honduran city will start to look like the economy in Hong Kong.
Suppose that you oversee a large organization, such as a corporation or a government department. If you want to effect change within the organization, how would you go about doing it? One approach is to change the internal rules and compensation practices–a change in institutions. Another approach is to hire people who possess certain traits and values–a change in culture. From my experience, I would say that if you are in a hurry you need to bring in new people and change the culture.
In the long run, institutions may be what matter, but that does not necessarily provide you with a guide to social change. Institutional change tends to affect people gradually, and you may never get to the long run. Most urban school reform efforts fail, because the entrenched teachers and bureaucrats outlast the reformers.
The quoted writers seem to assume that there is an either/or dichotomy between culture and institutions. This is not necessarily true. It may be that South Korea has been a success not simply because of its institutions, but because those liberal, free-market and (ultimately) democrtatic institutions meshed well with the preexisting Korean culture and the inherent capabilities of the Korean population. It’s also fair to note that the oppressiveness of the North Korean regime goes far beyond “collective ownership” and “central planning.”
I would not choose the phrase “different institutional structures” to describe the differences between North and South Korea.
Surely the real difference is one of ideas: some form of free-market capitalism in the South; some form of hard-line communism in the North. The differing institutional structures are a result of these differing ideas – not the drivers.
I am repeatedly surprised by the failure of brilliant men like Acemoglu and Robinson to oversimplify such matters. First, institutions are generally an aspect of culture. Historically, market economies grew up gradually over centuries and developed institutions (like the rule of law and the expansion of political liberty) that were embedded in a culture that tolerated and to some extent promoted interchange with and trust in strangers. The culture moved away from families, clans, and tribes and developed institutions to oversee the interactions of individuals from different groups within the polity. So the institutions that make up market societies are a part of their historical culture. The problem arises from the attempt to impose new institutions from the top down that are not fundamentally compatible with the culture. Japan had a highly complex society that promoted social cooperation and submission to the government. But it also had a strong militaristic tendency and contempt for foreigners. The defeat in WWII was overwhelming and damped down the militarism–it changed the culture in this manner. As a result, it was possible to impose Western-style democracy and to promote markets, both of which were compatible with the fundamental character of Japan’s culture, it’s emphasis on social cooperation. But Iraq has a very different cultural foundation, and you can’t simply impose democracy on it from the outside. Its culture is not hospitable. As for the Koreas–Communism is a political system that from the start has proclaimed its intent to root out the old culture and replace it with new values. The North and the South began with the same culture, but the North has spent decades attempting to impose a different social structure on the nation. Culture can to a large extent be crushed by totalitarian institutions. (That’s why we call them “totalitarian”!) So the comparison is wholly invalid. Yes, a massively powerful political state can impose a new economic structure on an old culture, but that does not disprove the importance of the interplay of institutions and culture for economic development and political health. But the long-term effects of this can’t really be known. Perhaps the nation to follow over time is Germany. How did the repressive policies of the East affect the “culture” of its people? Since unification, have they become as productive as their fellow citizens in the West? When repressive institutions distort (destroy?) an existing culture, can it be restored, or will it always be maimed in some way?
Ooops! The first sentence should read, “the tendency of brilliant men like Acemoglu and Robinson to oversimplify. . . . “
Where has democracy really worked? What the founders instituted in the US centuries ago probably wouldn’t be called democracy today, ie only white male property-owners could vote. You say that you need to bring in a new culture if you’re “in a hurry,” but you don’t change a society in a hurry. And why does it have to be one or the other: culture or institutions? Putting in better institutions probably helps change the culture for the better and vice versa. I suspect charter cities would be a roaring success, implanting a better culture by importing better institutions, which is perhaps why no govt wants to take that risk.
I am not sure I follow your question (stated as implying a fact) ”Why does average national IQ serve to predict economic outcomes?”
I recall an article in Science or Nature in the last three years that made this claim, but my understanding is that it was lousy statistical analysis. They found correlation between the two measures and concluded IQ caused wealth, when it is equally plausible that at the national level, wealth causes IQ.
You’re right that in the short run, people do matter. This is why socialism doesn’t collapse during the first generation. The first generation are people who trained and obtained skills and work ethics under a freer market condition. The second generation doesn’t have the benefit of this experience and they are completely different from the first generation. People respond to incentives but they also form habits and knowledge doesn’t just get erased.