Nobel prize winner

 NOBEL-WINNING ECONOMIST JAMES ROBINSON ON CHINA’S PLACE IN HIS THEORY OF INSTITUTIONS

NOBEL LAUREATE DISCUSSES HIS WORK ON ‘INCLUSIVE’ VS ‘EXTRACTIVE’ INSTITUTIONS AND HOW CHINA FITS IN

Published: 6:00am, 2 Dec 2024Updated: 12:21pm, 2 Dec 2024

James Robinson, a University of Chicago professor, was one of the three winners of the Nobel Prize for economics this year. He shared the prize for his work with two professors at the Massachusetts Institute of Technology – Daron Acemoglu and Simon Johnson – researching global inequality. He has co-authored three books with Acemoglu, including the bestseller Why Nations Fail: The Origins of Power, Prosperity and Poverty, first published in 2012.

Robinson, Acemoglu and Johnson have written extensively on the relationships between political and economic institutions and wealth. They argue that states with “inclusive institutions” that uphold the rule of law and property rights – as opposed to “extractive” ones – lead to economic success.

This interview first appeared in SCMP Plus..

Your research into the relationship between institutions and economic prosperity has been front of mind among Chinese intellectuals and investors.

Some argue that your theory of a relationship between an inclusive society and prosperity is unable to explain “the China model”.

One common argument is that China reported average gross domestic product growth of 6 per cent to 7 per cent for a decade before slowing down and setting GDP growth targets of around 5 per cent. When compared with the United States, the nominal GDP growth of China may be decreasing, but when compared with all other democratic economies, it is increasing. How does this fit in with your theory?

In the late 1970s, since the period of reform initiated under Deng Xiaoping, China started growing economically, exactly because economic institutions were moved in this more inclusive direction.

Collective agriculture was dismantled. The household responsibility system gave people incentives. It allowed them to make decisions. It made them residual claimants to their efforts. That sort of spread into the industrial manufacturing sector in the 1980s. So it was the sort of collapse of this socialist control of the economy that allowed all of this economic growth to happen.

So I think that is clearly within the scope of our theory. It’s a transition from what we call much more extractive economic institutions to much more inclusive economic institutions.

What is not kind of consistent with our theory, is that political institutions have remained extractive in the sense that control is still monopolised by the Communist Party.

What we say is: if you want to have an inclusive economy, then that is really a political construction. You can’t have that at the whim of a dictatorship. So that needs power to be spread in society, so that the people who benefit from economic inclusion actually get to control things.

So I think the prediction of our theory for China is very straightforward, which is that mainland China doesn’t have a political system which is consistent with creating a modern, innovative, prosperous society.

China sees slowest economic growth in over a year with 4.6% GDP in third quarter

In Why Nations Fail, we give many examples historically of societies that experienced periods of what we call extractive growth like this. The most obvious example is the Soviet Union. When I was a student, the Soviet Union was an example of terrific economic success. Fifty years after the first central plan, the Soviet Union grew very rapidly. It fooled everybody. It fooled generations of economists. It fooled the CIA. It fooled its own leadership into thinking the Soviet Union had a model of economic growth that worked.

There are many differences between Chinese economic growth and that in the Soviet Union. But I think what’s interesting about that example is how we can be fooled into thinking we just extrapolate from the last couple of decades, and we think it’s going to go on forever. So I think if you look at the history of China, and you look at the history of what that kind of concentrated political power can lead to, you can see that this is not a model that will be sustainable.

The world’s two largest economies, the US and China, developed from very different institutions. Which model do you think has been more influential among developing economies? And how do you think this influence will affect their understanding of inclusive institutions?

I think the whole economic expansion of China in this period of intensified globalisation has been good for the Global South, or developing nations, in the sense that it’s driven up commodity prices, and it’s increased the demand for many commodity exports. I don’t think that’s done much, honestly, for institutions in the Global South. I’ve actually done a lot of research on this – there is very little evidence that economic growth, per se, changes institutions. So I don’t see it; it’s just as likely to keep autocratic regimes in power as it is to [democratise them]. In Venezuela, for example, if the oil price goes up, that’s good for the dictatorship rather than being any kind of democratising force.

So, I don’t see that this boom in commodity prices, which is generated by Chinese economic growth, has many implications one way or the other for the Global South.

And I don’t think you have to be a genius to predict what’s going to happen during the next [Donald] Trump administration, which is an intensification of these trade wars and a kind of contraction in globalisation. Although you can never tell with Trump – he has no principles, and he has absolutely no kind of understanding of economics as far as I can tell – he could completely change policy tomorrow. So, bearing that in mind, I think you’d have to guess that we’ll have an intensification of what we saw last time. [US] President [Joe] Biden didn’t touch the tariffs on China, and it seems to have somehow been communicated to the average American that China is somehow taking advantage of the US, which it has, in the sense that it’s violated enormous numbers of intellectual property rights and expropriated property rights on technologies and things like that.

Today, the US and China are engaged in a keen and wide-ranging competition. How do you think that has changed and will change the world’s development?

I think it seems likely we’re now locked into trade wars. Trump has sold his political coalition on the idea that China is “stealing your jobs”. I think that’s powerful rhetoric that won’t be easy to move away from.

I think the most interesting thing is how China sees its role in the world. I don’t think we in the West really understand this very well. If you look at the history of Western countries, they’ve had this very expansionist idea – think about European colonialism.

Europeans have this view that ties into Abrahamic religions. Christianity, for example, is a very expansionary religion, and so is the broader Abrahamic tradition. They want to convert the heathens and see the world in terms of believers and non-believers. That’s kind of the way we think about international relations. We tend to assume that China thinks in exactly the same way we do, but it’s never been obvious to me that that’s true. Chinese religion, for example, is very different from the Abrahamic religions.

If you look at the history of the Chinese state, for example, during the imperial period, China actually had a very different attitude towards other powers, like Korea. Korea is always used as an example: the imperial Chinese state could have annexed Korea, but it didn’t. It seemed happy with a tributary relationship. China maintained a sphere of influence, but it didn’t have an empire in the way Europeans did; it didn’t seem to have expansionary designs.

So, rather than the trade question, I think the bigger question here is how China sees the world and its place within it. Obviously, China would like to be recognised on an equal footing with the US and other great powers, and it would prefer an international system – which at present is highly biased towards Western powers – that is more level. I don’t think that’s such a bad idea, honestly. But how that plays out, I don’t know.

Would you say that an extractive institution can sometimes match the economic achievements of an inclusive institution? Could this be why building inclusive institutions might not be as attractive to developing economies?

For me, places like Latin America and Africa are stuck in these particular extractive institutions, but for very different reasons. Latin America is different from sub-Saharan Africa, and both are different from South Asia or other parts of the world. I’m not sure that the expansion of trade and world economic growth over the past 30 years has really done much to change that.

I think if you look at all of these Washington Consensus reforms that were implemented in Latin America in the last 30 years, they’ve basically been a dismal failure, despite economic growth.

But this argument is interesting, which is to say that maybe if you’re just getting this influx of income generated by trade, taxes or whatever, then that undermines your incentive to create inclusive institutions.

But I don’t think there’s much incentive to build inclusive institutions anywhere in Latin America anyway, for example, with a few obvious exceptions like Chile, maybe Costa Rica, and Uruguay.

But are inclusive institutions the cause or the result of economic prosperity? How should we understand economies like South Korea, Singapore, Taiwan or even Japan that were able to achieve high growth and economic development before political liberalisation or before democratic institutions were fully in place? Would you say economic successes have driven them to have more inclusive institutions?

I don’t think so. If you look at South Korea … I have actually been doing a lot of research on South Korea in the past five years on what exactly happened during the 1970s when president Park [Chung-hee] was kind of in charge of all of this export promotion.

His legacy was the economy. It was like building roads. It was exporting.

If you get someone like that who’s sort of genuinely interested in developing his country, that’s great. But how do you sustain that? That period in South Korea is very important, but in the end, it is when the military leaves power, and then you get this democratisation, and that is when growth and diversification really happens in Korea. If I look at Korea, it’s a triumph of inclusion. It is not just about Samsung or cars or mobile phones. It’s about K-pop and “Gangnam Style” and movies. There’s just this explosion of creativity in South Korea. For me, you could never have sustained what went on in the 1970s without that democratisation.

“What about China?” is one question your work has always faced. What do you think about that?

I think it is an interesting discussion, which we’ve been thinking about a lot. Could China be an exception in some sense? And if it is an exception, what could that look like?

This is not physics, this is social science, and there are many things we don’t understand about society

For me, I think that would be a kind of cultural type of explanation, in the sense that Chinese culture, or Chinese political culture, is very distinct from Western political culture.

If you think about the notion of good governance in Confucian thought, that’s extremely different from the notion of good governance in Western thought.

So could it be that there is just a different way of thinking about political legitimacy and the allocation of political power in China than there is in the Western world?

Here is another reason why that might make sense: if you look at these autocratic regimes that have been successful economically in the world, they’re all in East Asia. Taiwan under the Kuomintang, South Korea under president Park [Chung-hee]. Cambodia in the last 40 years. Singapore under Lee Kuan Yew. Can that be a coincidence that all of these countries are in eastern Asia? And if it isn’t a coincidence, then surely that’s got something to do with something specifically cultural.

I don’t think it’s kind of a political thing. It’s not like everywhere has the Communist Party. No, they have completely different political regimes. So I think that is an interesting kind of academic discussion. I think the evidence on that is sort of confusing.

So if you ask me what does my theory imply – it implies what I told you, but that doesn’t mean that as an academic, we’re not investigating other ideas, right?

Since you are open to the idea of China being an exception, would you ever consider exploring this further?

I have worked a lot in Latin America and particularly in sub-Saharan Africa over the past 25 years.

I know from my work in sub-Saharan Africa, in particular, that political culture there is extremely different from that in Western countries. And I think much – actually, more than much – social theory is essentially generalisations about the world based on Western culture, Western history and Western experience. So I’m painfully aware that we don’t really have a very good comparative social theory. In fact, one of the things I’m most interested in is exactly this topic, and China obviously plays a very interesting role in it.

I think that’s a fantastic discussion, but I don’t know what to conclude, and maybe that’s just because I’ve never really done research in China. So I don’t feel that I have a thorough understanding of the society or the culture. I have Chinese colleagues here, and we talk about it all the time. Yes, I’m an academic. This is not physics, this is social science, and there are many things we don’t understand about society.

How do you think the development of technology, especially artificial intelligence, will change the relationship between institutions and prosperity?

I don’t think they’ll change the basic relationship between institutions and prosperity. I think professor Acemoglu and professor Johnson have written much more on this than I have, if you read their book, Power and Progress.

My view is very similar to theirs, although I’ve written much less about it. I think what’s created all the prosperity in the modern world over the last 250 years is all this technological change and innovation, but the institutions are critical, not just for stimulating innovation in the first place, but for utilising those technologies. How do those technologies get used? Are they used for the benefit of everybody in society? Or are they used for the benefit of a few people?

One of the biggest concerns we’ve had over the past decades is that modern information technology, computer technology, robotics, and now AI are being controlled by tech entrepreneurs and very narrow corporate interests.

The problem is that innovation is so fast, and the government is so far behind in understanding what’s happening and thinking through the implications of these things. Just think about the kind of automation of work that’s going to lead to. There’s already a lot of evidence it’s leading to falling wages and displacement of labour. But that’s only because of how the technology is being used. There’s nothing inherent about AI or robotics that dictates that outcome – that’s about the regulation of the technology and the way the technology is used.

That’s the crucial issue at the moment – these technologies are potentially fantastic. They can raise productivity and create prosperity, but they can also create this incredibly unequal, hierarchical society and exacerbate things. Where are all these political problems in the US coming from? Part of it is maybe to do with the “China shock”. But part of it is also to do with technological change, displacing unskilled workers and creating this massive concentration of wealth and inequality.

Do you think AI will lead to a re-evaluation of existing institutional frameworks? What potential challenges or opportunities do you foresee for institutions in adapting to AI-driven economic changes, and what impact might this have on overall prosperity?”

I don’t think so at the moment. My experience working with AI is that it is currently wildly overhyped. It’s being wildly overhyped by businesspeople who are trying to raise money and persuade people to invest in their corporations. I don’t know if you’ve interacted with AI – ChatGPT is a very underwhelming experience for me. ChatGPT makes things up and doesn’t get basic things right. The whole thing is also somewhat circular in the sense that ChatGPT and all this AI are learning from content they themselves generate.

So, my feeling is that the whole thing is really overhyped at the moment. Computers are not about to take over the world, and this is not as earth-shattering as people think. In the future, will it be? I don’t know – I’m not enough of an expert. But at the moment, I don’t see the threat you’re talking about. What I do see is the threat of massively displacing workers and creating more social dislocation, and that worries me.

Additional reporting by Sylvia Ma