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0:36 Intro. [Recording date: March 14, 2012.] Russ: Your book is an unbelievably

ambitious and sweeping account of historical economic issues. What are you

trying to explain? What are you trying to understand and illuminate with this

book? Guest: I think one of the key questions that gets many people into

social science is the same one that Adam Smith pulls: The Wealth of Nations,why some countries are poor, why some countries are rich. Two hundred and

fifty years or so after Adam Smith wrote the book that shaped economics, the

puzzle is deeper. The gaps between rich and poor nations have widened, even

though we live in a very integrated world. And we haven't developed a

satisfactory and comprehensive answer to what factors are at the root of

these differences and why there are such glaring gaps in prosperity across

nations. That's the question that we are trying to answer in this

book. Russ: There are a number of attempts that have been made to explain

it. And of course it's possible there isn't one theory that explains everything.

But we, as human beings, seem to be drawn to single-idea theories. Talkabout some of the alternative explanations that you reject in the book that

have been prominent and used to explain growth and poverty. Guest: I used

to say there are as many theories on this as the number of authors who

wrote on it, and then I realized that some of them do more than one

theory. Russ: That's right.Guest: So, there are a huge number of them. But

there are a couple of those that are very influential when you look at the

writings of academics or pundits or journalists. One of them that perhaps is

the least favorite among academics but still kind of has a presence is the

geography hypothesis, that some places are rich because they have a

favorable climate or-- Russ: Natural resources-- Guest: Yeah, good natural

resources. And so on. And I think the evidence doesn't support that. There's a

very interesting thesis that Jared Diamond's Guns, Germs, and Steelsort of

formulated, which is that really the geographic factors determined where

early civilizations blossomed, and that, almost in a deterministic way, shaped

which societies are more developed today. And we go in detail about why we

sort of disagree with the thesis and why it's not really capable of explaining

the patterns of what we see around us today; but they are interesting sort of

variants of this. But the one that I think is more kind of popular among

journalists and academics is a sort of cultural hypothesis. Max Weber was the

person who developed the most famous example of this, or the Protestant

ethic and constructive process; and Catholics. That's not as popular perhaps

today. But if you sort of ask people why China is doing so well: Well, it is

about Chinese culture. Why the Mexicans aren't doing so well or why sub-

Saharan Africa is poor: It's all about national cultures or some cultural traits

shared by a variety of individuals; or it would be Muslim versus non-Muslim.

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And again, we try to explain why such explanations are very limited. China

has had the same Chinese culture but it did extremely badly under Mao--

Russ: For a few centuries-- Guest: Sorry? Russ: They did extremely badly

for a few centuries. Guest: Yes, but even more recently, they did extremely

badly 40 years ago when they had terrible incentives under Mao, andsuddenly started doing well when the incentives changed. And all the while

the same people in Hong Kong were doing very well. That should tell you

something. But the one I think is most popular among perhaps the listeners

to this podcast, or more broadly among economists, is what we call in the

book the Ignorance Hypothesis. And we are sort of naturally drawn to that as

academics because our business is to think of good policies and judge which

policies are bad, and so we think that that's really important. Many of us--not

me--but many of us do advise governments so we think that the advice that

governments get is really important. So, if only Greece listened to the right

advice, or if only Ireland did the right policy, or the U.S. President had theright policy. Russ: There's something to that. Guest: Yes. Obviously we, as

economists, know, can analyze policy better; there's good policy and there's

bad policy. But what we try to articulate in the book is when you look at the

policies and choices that are most consequential for economic development,

they don't get it wrong by mistake. They get it wrong by design. It's not that

people don't know what's good or what's bad, but just like Mugabe choosing

policies that would destroy the economy with 100,000% inflation, and total

chaotic land grabs--they are not about achieving prosperity for the nation.

They are either clinging to power at any cost or enriching a specific group of

people, including themselves, at the expense of the rest of society. So, that's

the sense in which we say they get it wrong not by mistake, not by

ignorance, but by design.

6:24 Russ: How would you categorize the arguments where people say--and we're

going to come to your explanation in a second--well, we know what causes

prosperity: it's the rule of law, private property, incentives with decentralized

price system; and yet often when those "solutions" are put in place where

they had not been before, nations don't prosper. Eastern Europe, Russia,

being an obvious example. Now, two possibilities: One is that they didn't

implement the policy; and the second is something else was missing. Where

do you come down on that debate? Guest: Actually, I think it would be useful

to come to our explanation. In answering that question I think we'll come to it

in your next question. Russ: Go for it.Guest: Our explanation is that these

things are really important: prosperity is created by incentives, and incentives

are created by institutions. So, private property is very important, markets

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are very important, freedom to trade is very important. But, our explanation

really sort of departs perhaps from some of the versions of the stories. These

things don't exist in a vacuum. They need to be also supported by political

institutions; and they need to be effective. So, what happens is if you take a

society that's dysfunctional, say, for example, Russia, and on top of it youjust foist a privatization scheme because that's going to take you closer to--

Russ:prosperity-- Guest: to a market economy, what you are doing is you

are taking an entire ill-distributed system of political power and then you are

just giving people one more ability to grab assets. And what you get is not a

market allocation, where assets go to the people with the best use and people

can sell it and buy and sell in whatever way they want; but the people who

are politically connected are able to grab these very useful state assets very

cheap. And you end up with millions of oligarchs. So, I think that's a good

parable for how our view differs from--just worry about markets being open

and don't worry about anything else. You really need to worry about thepolitical system and the social context in which those markets are

situated. Russ: So, I think that's undeniably true. It reminds me of a podcast

with Diane Ravitch; we were talking about educational reform, and she's very

critical of attempts to introduce business models or incentives in education.

And I came to the realization that it's not dissimilar from these issues in

development, where what appears to be a good solution, incentives, if it

doesn't have the embedded other pieces that emerge naturally with

institutions, the incentives don't work very well. Or worse, they end up being

perverse. Guest: Right, exactly. Russ: I'm thinking about Enron or

California's attempt to create an energy market, which was highly--it really

wasn't anything like a market except that it had prices. So it's like a market

but it didn't have all the other parts of a market that matter. Guest: Yes. I

think the problem is two-fold, and I think that's very important. One is that

it's not going to work--for exactly the same reasons as the Russian one

didn't. Because you introduce market, supposedly--prices--but in the end

that's just a facade. Still in the background power is so unequally distributed,

the connections matter so much, that people are going to make the

allocations not on the basis of those prices but on the basis of who actually

has the information about which state assets are being sold for cheap and can

shut out other competitors. And so on. The second thing is that you may even

get it to work momentarily. You may be able to have a market economy

foisted upon a system in which political power is extremely unequally

distributed and is in the hands of a small minority; but then at some point

they are going to have the incentives and say: Why don't we start playing

around with the market incentives so we actually are benefited ourselves?

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Why don't we start putting entry barriers so that people don't compete

against us; why don't we start grabbing some of the assets that people have

now built with these market incentives. And once the realization of that

possibility comes, of course the entire incentive system implied by the

markets and property rights are going to collapse because of the politicalsystem is going to interfere.

11:22 Russ: To give the listeners a little bit of the feel for the analysis, talk about

Nogales, Arizona and its Mexican counterpart and how--it's only one data

point of course, but it illustrates why other explanations are not so satisfying

and how your explanation has a chance of being a better

explanation. Guest: I think it's a very simple example, and you can find

several others. When you compare two societies at two different ends of the

world, there are so many things that differ; and if somebody wants to say,

no, it's not really the incentives, not really the institutions, but it's the cultureor the geography, one can--it's very difficult to argue against it in a

conclusive manner. But if you look at a society that's ethnically, culturally,

geographically very homogeneous but you divide it through a border and you

set different sets of laws and incentives on one side than another, then you

have something that's almost like a natural experiment. You can see how two

different parts that are otherwise similar are performing under institutions.

South Korea versus North Korea, Nogales, AZ versus Nogales, Sonora are

examples that we can come up with. And you can see, you cross the border

and you suddenly enter into a very dilapidated part, much lower levels of

income, people are not in school, they have low health, buildings are in worsesituation; and north of the border it's entirely different. Because one part is

part of the U.S. institutions and benefits from all of those incentives and

businesses from the rest of the United States. And south it's much

less. Russ: And the counterpoint to that would be--again going back to the

stupidity explanation--well, they have bad policies in Mexico, they have bad

policies in North Korea. I really like your point--we touched on this in a

podcast with Bruce Bueno de Mesquita as well. It's not so much that they

don't know what the best policies are. It's that they can't get there from here.

They've got certain public choice and institutional barriers which don't, to the

outsider, especially to the international economist who looks over and says:

Oh, this is easy to fix; we'll just do x, y, and z. Again, in those contexts,

North Korea and Mexico--why don't better policies help those people? Why

can't they get there from here?Guest: I would say our theory has three

parts. One part is about how institutions and through them the incentives are

central. These comparisons, Nogales versus Nogales, North Korea, they are

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about showing that these institutional factors are important. The second part

of the theory is about why are these institutions there in the first place. And

there is where we argue it's not stupidity, not ignorance; it's really conflict of

interest or people who control power as politicians or as leaders or business

leaders or whatever of the country, are having their preferred policiesimposed on society, even if it's not good for society. And the third part is

about how is it that those institutions change over time and why some

societies have ended up with one set of institutions versus another. So, in

some sense the Nogales comparison is all about showing it's about

institutions; but to argue that it's really not stupidity but more structural

factors, we need to look at other historical episodes. But I think this case is

very clear when you look at it. It's very difficult to make the case that the

reason why Liberia did so badly under Charles Taylor or Zimbabwe is doing so

badly under Mugabe or the Democratic Republic of the Congo--or Zaire as it

was then called--under Mobutu has very little to do with these leaders notknowing that was good or not being able somehow to get the right advice. It

had everything to do with the fact that these were very rapacious leaders;

they were just interested in their own power and enriching themselves, which

they have all done with great aplomb. And they were able to do so and at the

expense of the rest of society. Sure, the contrast when you look at Greece

versus, I don't know, Austria, is not as stark as when you compare Zimbabwe

to Botswana; but it's still there. It's hard to make the case that Greek leaders

for the last 20 years were just uninformed about what was good for the

economy or somehow unable to get the right advice. But there was a lot of

corruption; they didn't want to do the hard choices; they wanted to benefit

from the transfers coming from the European Union, which painting a rosy

picture to the population; and they were able to get people to go along with

it. Russ: So, the obvious challenge to that, and you deal with it in the book,

but I want to let you give the answer, is: Well, if you are exploiting your

people--and the phrase you use is "extractive"--if you are extracting

resources from the rest of the country for you and your friends, you'd think

you'd rather have a bigger pie to take your share from than a smaller pie. So

at one level there's a puzzle as to why these autocrats, who care only about

themselves, and no one is naive about that--why don't they just pass good

economic policies and take more? Guest: I think that's a great question, an

actual question that economists have asked. And I think the wrong answer

that some economists developed in the past is to say: Well, institutions will

gravitate toward being efficient because you can always separate maximizing

the size of the pie from its distribution, and nobody would turn down

something that would increase the size of the pie. And the reason that's not

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the right answer is because resources, the distribution of the pie, the sharing

of the pie, is not separable from what its size is. And we classify the reasons

for that into two in the book: we call them economic losers and political

losers. Economic losers is actually an idea that's very familiar to economists,

and I think a lot of people will sympathize with that, which is that many timesthe things that increase the size of the pie will come with a sort of

Schumpeterian creative destruction. New people will come in with new ideas

and replace the rents of monopolists, or the earnings of workers who have

specific skill for the old technologies; and we know that happens all the time.

But we argue in the book that even the more important problem is what we

call political losers; and by that what we mean is that many times the

changes that will make the pie bigger also change the distribution of political

power. And the distribution of political power is actually even more primitive.

Because after all, if all you had to do was keep your power and then some

new technology comes, you can always try to use your political power to getsome of the rent. But the real tragic thing if you are a leader that is just

interested in your own bottom line, is that the changes are also going to

unseat you. And that's what the political losers are about, and what we try to

show through historical example is that many of the fundamental

transformative technologies and many of the institutional changes that

unleash economic growth throughout history have come together with

changes that weaken the political power of rulers. And that's why they've

been resisted by rulers.

19:52 Russ: I just want to mention to listeners--there's no way in a one-hourconversation that we can do justice to the scope and breadth of this book. It's

a little short of 500 pages, but the historical richness of it is quite

extraordinary. It spans time and place in an incredibly ambitious way, and in

a very informative way. Guest: Some would say too ambitious. Russ:That's

true. That's one of the challenges of a theory of everything--that you are

trying to make everything fall in there, or at least a large number of things,

and so I'm sure there are people who quibble or complain a lot about any one

particular example. But I think the success of the book is the volume of those

examples and the richness with which you discuss them. Let me ask you a

question along the way. The book is called Why Nations Fail. I'm curious why

you called it that instead of "Why Nations Succeed." Any particular answer

there? Guest: Yeah; it's a very boring and bad answer, because "Why

Nations Succeed" doesn't sound as good. Russ:Succeed is not as attractive in

its cadence. Guest:Why Nations Failhas this sort of a single-wordish feeling.

The right title is: Why Some Nations Fail and Others Succeed. But that's just

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a mouthful. Russ: Or:An Inquiry Into the Nature and Causes of the Wealth

of Nations.Guest: Somebody had taken that one. Russ: Of course, you can't

copyright a title, but it's awkward I think to take a title from someone

else. Guest: And a little pretentious, I would say. Russ: But that's Adam

Smith's--that's the full title of Smith's book The Wealth ofNations. Guest: Just like someone in macro writing today a book called The

General Theory. A little pretentious. Russ: So, how do you see your work

relating to Smith? Because there are certain overlaps. Guest: He's a beacon.

So, I think Smith, much more than anybody else, had it right. He had a lot of

things right. But what he didn't do is that he sort of didn't go to the political

level. He really understood how incentives work, he really understood the role

of economic institutions. So, essentially what we describe as inclusive [?]

economic institutions versus extractive economic institutions is more or less

what Smith describes. Of course, there have been changes since then. We put

more emphasis on innovation, the power of innovation totransform. Russ: There's been a lot more. Guest: Yeah, we've seen much

more of that. Things like equal access to education so that people can depart

[?] of the modern technology, that doesn't feature as much in Smith because

the times were different. But there are remarkable parallels. But what Smith

sort of doesn't engage so much with is: How is it that you make this type of

economic institutions stick and emerge? And that's where our notions of

inclusive and extractive political institutions come in. That's where we sort of

build on Smith and expand on him. Not that he was unaware of it. He has a

famous passage from another work, from a letter, I think: In peace, easy

taxes and a tolerable administration of justice--as sort of the three factors

underlying it and you can sort of recognize them as political factors at some

level. But that's not where he goes. The other person on whom we build very

heavily is Douglass North; and did put a lot of emphasis on both political and

economic institutions. But we sort of go further, I think, than Doug North, and

try to understand why some institutions emerge in some places and the

interplay between economic and some political institutions. Russ: To be fair

to North, his work with Weingast and Wallace--we did a podcast with Barry

Weingast on this-- Guest: Fantastic stuff-- Russ: They emphasize open and

closed orders where people have access to political and economic power. It's

not too dissimilar to your pluralism. Guest: No.

24:02 Russ: Give a little, flesh out a little bit more, your view of government as a

healthy institution, because I don't want readers to misunderstand your

thesis. You believe that a strong government is crucial, but not too

strong.Guest: You need to have a government that's strong enough to

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impose law and order , regulate things it needs to regulate. But at the same

time, the government needs to be, a). checked--that's the same idea, goes to

our Founding Fathers, checks and balances, restraints on power; but also it

needs to be responsive to a broad cross-section of society. In other words,

what we call in the book, pluralism. Or a different way of putting it, thereneeds to be a broad political equality in society. So, you won't get good

political institutions from which inclusive economic institutions will follow if

political power is concentrated in the hands of a narrow group, be they

unions, the businessmen, landowners, an ethnic minority-- Russ: the

military-- Guest: that's not going to be conducive. You need everybody to

have a political voice. And that political competition will sort of rule out

policies and choices that will enrich one group at the expense of the

rest.Russ: Now let's take some specific examples. Many of them are quite

fascinating, and we can't get into all of them. Let's start with the Black Death.

Not many times I get to say in a podcast, "Let's start with the Black Death."One of the things that you are interested in is the evolution of institutions. It's

not enough just to say these guys had good institutions, these guys had bad.

You talk a lot about critical junctures and some path-dependency throughout

history. Why was the Black Death, which was a nasty plague that swept

through Europe--what did it do to the institutions?Guest: I think, taking a

step backwards, I said we talk about the three pillars of our theory, the role

of institutions, why bad institutions emerge and stick around, why these

extractive institutions are not mistakes but are by design; and then the third

is how they actually change. Where we put the emphasis on how they change

is the same sort of conflicts that are inherent and lead to extractive

institutions sort of emerging and persisting also mean that there will be

people who try to bring down those extractive institutions. There will be those

who bring them down so they can build their own extractive institutions, or

sometimes people will try to sort of get themselves out from under those

institutions, to get some relief from the extractions. And many of these

conflictual periods sort of come to a head during periods of what we call

critical junctures--if you want to think of it as social and political

disequilibrium period, when a shock hits and the existing balance is disrupted.

And at those points, these existing paths of institutions will interact at these

critical junctures, leading to a divergence. Because in some places the conflict

will resolve in one way and in other places in another way. So, the Black

Death is one of the examples that we start off things to illustrate how this

works--a huge plague that really ravaged the population of Asia and Europe,

but mostly we focus on Europe. And really shook the foundations of the

existing feudal regime. What happened when the Black Death hit, of course

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there were millions of people, up to perhaps a third or more than a third of

the population of many parts of Europe perished. But it also changed the

economic landscape in a major way. So, Europe was in a manorial system

based on servile labor at the time; and many of these people died, both in the

countryside and in the cities. So, through the usual economic channels, thedemand for labor increased. There was much more land per worker and much

more work in the urban areas for a worker to do as a result of the decline in

population. Russ: The supply of labor decreased. Guest: The supply of labor

diminished big time. So, now this created two opposing forces. One of them is

that the elites, who were the masters of this servile labor, now they had an

interest in extracting even more surplus out of the labor, because the

marginal product of the labor was higher. If there was a free labor market,

wages would have increased because supply went down, as you just said. So,

now if wages are high, I can take even more of that. But against that, once

labor became more scarce, political power increased. More pull from urbanareas; you could bargain with your employer because your employer was

really dependent on you--you were the only employee that he had. And other

feudal lords or cities were trying to attract as many laborers as possible. Now,

which of these two opposing forces are going to come out dominant? Well,

that depended on the political path and the social/economic path that they've

taken. And the contrast that we give is between Western Europe, England,

and Eastern Europe. What happened in Western Europe was that the cities

were strong enough and there were already protections for peasants for a

variety of reasons and because of some of the peasant uprisings, that actually

the workers were able to sort of get the better hand. And many of them

actually gained their independence and reductions in the dues that they had

to pay to their lords and so on. Whereas what happened in Eastern Europe

was that actually this was a prelude to the second serfdom, where the

obligations of the serfs became even more onerous. So that's sort of the

illustration of the critical juncture and how it plays out; but of course its

implications for the development of Europe were major because that was the

collapse of the feudal regime, and the market economy started building as all

of these labor obligations and bonded labor started leaving the scene in

places like England, France, and so on.

31:19 Russ: I'm going to ask you a very complicated two-part question. You

answered one question that's bothered me as an amateur historian: there

was a point in history--this was probably 1500s, shortly after the Black

Death--where there were three dominant, very successful countries in

Europe. And high standards of living for at least a small part of the

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population. Differed by country, of course, in how much it was spread. But

England, Spain, and Holland--the Netherlands--were all very successful at this

point. Or at least had shown a lot of growth. They had done a lot better than

they had before that. We go forward a few hundred years later--and Deirdre

McCloskey has a very interesting argument--it's also very ambitious--that thiswas a cultural change. I'll let you throw in a critique of that if you like it. A

certain tolerance for commercial life became apparent at that point, or

emerged, and that allowed some of these countries to succeed. Particularly in

the Netherlands and in England. And this became eventually the Industrial

Revolution, and yet England dominates over that time period, and Spain

fades away as an international power, national economic force. And Holland

becomes a much sleepier place. How do we explain that very broad

procession of history, and in particular, you focus on why the Industrial

Revolution had its home in England. I'll give you 90 seconds. No, you could

have a little more time. Obviously we could spend two hours just on that, buttake a stab. Guest: Right. I'm going to give a very short answer. Russ: It's

in the book; folks, if you want to read the book-- Guest: That's the 90-

second answer. But I think the answer is very instructive. Spain is benefiting

a lot from the New World trade. But look atwho is benefiting from the New

World trade. It's the Crown. Actually the Crown is getting stronger in Spain.

The Parliament, Cortez is never called because the Crown is so powerful.

Whereas in England, the gains from Atlantic trade, because of the way that

the English monarchy had previously bargained with Parliament and passed

laws, is not the monopoly of the Crown. And so it enriches many of the

groups that are most opposed to the Crown. And they want their

independence. And as a result, the same process that is leading to

enrichment but political closing down in Spain is leading to a series of

institutional changes that bring constitutional monarchy and the beginning of

what we call inclusive institutions in England. And it is--those inclusive

institutions are sort of enshrined in the aftermath of the Glorious Revolution

of 1688 and 1689, that really are directly leading to the changes in incentives

and changes in market structure that underpin the Industrial Revolution that

starts 50 years ahead. I think it's very difficult to see how culture is such a

driver here. A lot of the cultural factors are developing slowly over time. In

Europe there's a lot of shared culture, actually, at that time. If you think of

Enlightenment, for example, Enlightenment doesn't start in England, doesn't

start in Scotland; the Dutch Enlightenment is perhaps the most path-breaking

here, followed by the French. Those are all important factors, but those are

not the things that really make people throw themselves into finding

innovations and spinning and weaving technologies, and mental energy, and

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engines that really transformed the British and English economy. Russ:I'll let

Deirdre defend herself another time on the program, but I think what's

striking in your treatment of this is when you catalog some of the incredible

innovations that take place in England. And many of them do take place in

England. Of course, you could be cherry-picking the data; I don't think youare. I think the dominant, and I think there's a consensus on this, that the

dominant innovations did come from England. If I remember correctly you

argue that they came from England because they had an incentive to find

them. And everybody else had less of an incentive.Guest: And some of them

actually came from people who emigrated to England from other places. They

did so because the same innovations would not have been rewarded--in fact

would have been punished in other parts of the world. So, we give the

example of Puffin, for example, who also made very important advances in

the steam engine. But his innovations would not have been allowed, and he

was trying to emigrate to England because he thought: That's the only placewhere I can actually make these things true. He died before he could do that.

36:36 Russ: So, to push the mix of geography and culture just for a second, and let

you respond to it. One of the things that's striking about your book--I

remember as a young person, I don't remember how old I was, but I readThe

Conquest of Peru, by Prescott, which I think has uncertain historical accuracy.

But it's an utterly fascinating book. May be a work of mostly fiction. But it's

fascinating, about this clash between the native people of Peru and the

Conquistadors coming from Spain. And what your book lays bare in a very

brutal and important way is how badly--badly doesn't do justice to it--howbrutally many of the colonizers treated the native

people.Guest: Absolutely. Russ: You give the example of the Dutch in the

East Indies not just subjugating the population, not forcing the patriation, but

just murdering an enormous portion of them and leaving a few behind to help

exploit the natural resources. In the case of the Spanish in Latin America, in

South America, just a brutal serfdom and slavery and extractive relationship.

And then you contrast it with the British relationship in North America, and

you are going to use that of course to understand the evolution of those two

parts of the world; North versus South America turn out very differently

decades and then centuries later. And you mention that, well, when the

British got to Jamestown, they weren't able to subjugate the native

population and they had to actually get along, and eventually trade.

Obviously there was a lot of exploitation and cruelty to the native American

population, ultimately. But in the early days it was nothing like what was

happening in Latin America. And similarly in the case of the Black Death, the

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political response is that the Crown in England, how they responded to these

labor issues and were forced by competition in these market forces to share

wealth and share power, didn't happen in Spain. It does cross one's mind that

maybe there's something unusual about Britain and the English. Guest: I

think that's a very natural thing in people's thoughts. Adam Smith also, AdamSmith on British colonies was very different. Churchill wrote volumes on the

history of the English-speaking people. Russ: Well, they would. They are

biased. Guest: But it's not true. It's not true. And that's what we try to sort

of explain. If you look at the history of the Jamestown colony, it's remarkable

that the people who were the governors and the captains of the Virginia

colony, their model of colonialization was identical to that of Pissarro and

Cortez and all of the Conquistadors who went to the East. They wanted to

subjugate local populations and get food and gold from them. They couldn't

do that because there were no such populations to subjugate. There was no

gold, nothing to grab. Once they couldn't do that, they said: Okay, fine, let'snot subjugate that population; let's bring our own sort of serfs from Europe.

So bring people who were poor enough to sell themselves into indentured

servitude, and they'll be the lower class and we'll be the upper class. They

called them under different names, like [?] in Maryland. And that was going

to be a very two-class society, very textbook extractive institutions. That

didn't work either. So, it wasn't out of the goodness of their heart, but

because once these people came in, because the environment was so

different that there was the open frontier, you couldn't coerce them to stay.

They could go and try to find their own plot of land. They made an about-face

and they said: Okay, fine, now this doesn't work; we'll give you economic

incentives. And then economic incentives were insufficient because these

were the same people who were first trying to subjugate you at the [?]'s

edge, and they said: Okay, fine, if you don't believe the economic incentives

we'll also give you political incentives. We'll also let you have a general

assembly, so that from now on you will be the rulers of this land. And that's

when sort of the very different institutional paths that later became the

United States started.

41:11 Russ: I just was puzzled why the British were unable to enslave the native

population. Did they not send enough people? Guest: Oh, there wasn't

enough native population. Russ: Oh, you think it was sparse. Guest: The

power really draw there, was that in the same way the Spanish were not able

to enslave the native population when they went to what is today Buenos

Aires. They went there; the people countered; they were the Charruas and

the Guarani [?], and these people were very hunter-gatherers, very sparsely

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settled, just like the native Americans in North America. And the Spanish

couldn't enslave those either. But the Spanish could go out to other parts

where there were hierarchical, more densely-settled civilizations that they

could enslave and subjugate. But the Americans, the British, didn't have that.

And the British didn't have that precisely because they were latecomers to thegame of colonialism. Russ:They got the worst-- Guest: You know, the

Spaniards didn't want North America. North America wasn't the prize

colony. Russ: Well, that's because they didn't get the taxes and find all that

oil. But your basic point is obviously correct, that the gold and silver of South

America was an incredibly seductive draw for Spain. Tell me if this is

accurate: One way to describe the difference between the British experience

in North America and the Spanish experience in South America is that in

North America it was much easier for the Indians to run away. Whereas in

South America a lot of them had big, large population

centers. Guest: Exactly. But again, it's not because of the Spanish versus theBritish, the South versus the North. The same thing happened exactly to the

Spanish Conquistadors when they tried to colonize the area around Buenos

Aires and Uruguay. The Charruas and the Guaranti [?] ran away. Because

they were sparsely settled and they did not have very well-defined, settled

hierarchies like the Aztecs or the Incas.

43:22 Russ: Shifting gears, Africa and South America are generally quite poor

relative to North America. But there are exceptions, which make it

interesting. In South America you single out Chile and Argentina; and in

Africa you single out Botswana. What went right for those three? Guest: Iwouldn't say Argentina, we single out in the same way. Russ: I guess you

can't single out Argentina and Chile--I'm not sure you can "single out" two

countries. Guest: Sure. But also I think the story for Argentina is very

different, and it's a tale of caution as opposed to the Botswana case. Let me

say a few words about Botswana and then I'll come back to Argentina. I think

Botswana is very interesting. It was one of the poorest countries at the time

of independence; no great resources, at the time; very few educated people,

no roads, no infrastructure. It would have been on the list of everybody and it

was on the list of everybody who didn't make a list, of countries that were

going to go nowhere. And then of course it became the fastest-growing

country in the world. Why? Well, one factor was that they discovered

diamonds. But that's not a factor, because they've been discovered

everywhere in Africa, and there's civil war and all sorts of bad things. But the

key thing in Botswana--the only country in sub-Saharan Africa to have had

this distinction--it has had an unblemished democratic record. What

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happened was that it was one of the unique places in the colonial world where

colonial powers, in this case the British, did not interfere with existing

institutions, because they thought this was such a useless place, just a buffer

zone, just leave it as it is. There were accidents, the contingent paths of

history, that made them do so, which we go into detail about in the book; butthrough a variety of factors, the pre-colonial institutions in Botswana

survived. And then one more lucky thing--the pre-colonial institutions in

many places were pretty awful. In Botswana, as these things go, they weren't

so bad. They were much more participatory, and there was some nascent

amount of pluralism in Botswana. And it was that--they were again lucky

perhaps because they had leaders that were not Mugabe and Mobutu. Those

pre-colonial tribal institutions became the basis of its democracy; the

democracy functioned, people participated; and as a result there weren't

strong enough incentives to adopt extractive institutions or plunder the

diamond wealth or introduce marketing boards to drive the price of cattle--which was the main thing in Botswana--to zero, as they did in many other

sub-Saharan countries. And you see what happens when you give good

incentives to a place like that--it just grew. So, I think that's a very

instructive case. It shows what makes you distinctive is this ensemble of

economic and political institutions. It's not just free markets, but it's the fact

that its democracy worked that made it possible, orthodox policies, good

macroeonomic policies, free markets, and so on to survive. Now, the

Argentina path is very different. It's much more like Russia today. Argentina

became very rich despite its extractive institutions because of resources. And

that then came back to bite it. If you become very rich because of resources

but your institutions are deeply extractive, the moment the resources go

away or even before, the conflict is there and people are going to use the

institutions for enriching themselves. And the history of Argentina in the 20th

century has been coups and counter-coups. And when it has been

democratic, it has been the worst kind of democracy. Now, where policies

have been extremely populist and presidents who get elected--the elections

have still used repression and quite dodgy policies and means to control

power.

47:42 Russ: Let's talk about the Soviet Union, because you spend quite a bit of

time on it. I'm going to disagree with you a little bit on how you interpret it.

But give your explanation. You talk about how sometimes countries with

extractive political and economic institutions can still grow. Guest: Let me

bundle that together with China. We discuss them separately in the book but

they are very related, because today people are all enthusiastic about China,

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the Chinese economic model, the authoritarian growth model, and so on; and

our interpretation for China is it's exactly like a version of the Soviet Union.

Somewhat different; there are limits to the parallel. But the Soviet Union

achieved extractive growth. It used the state power to channel resources

from agriculture into industry, and it could do so in a rapid way becauseagriculture was so unproductive and it had a lot of catch-up growth to do,

because technology was so far ahead of where the Soviet Union was. And by

the forceful relocation of resources from agriculture to industry it achieved

remarkable growth for about 40 years. And we see China to be the same--it's

a form of catch-up growth under extractive institutions, and the theory that

Jim and I have is that unless China is able to fundamentally change its

political institutions as well as strengthen the reforms it has already

undertaken in its economic institutions, its growth, just like that of Soviet

Russia, will be short-lived.Russ: My issue with that is that I'm not really short

what kind of growth they actually had. An alternative explanation is there wasa measurement issue, and it's really twofold. One is that when they

transferred those folks--and in this case they literally transferred them; it

wasn't so much of a market process; a little bit more in China than in the

Soviet Union. When people became part of industry rather than agriculture, a

lot of the stuff that wasn't being measured, now was measured. Second, a lot

of stuff was mismeasured. I read, recently, a phenomenal book called Ivan's

War, by Catherine Merridale. She chronicles the daily life of the Soviet soldier

in WWII. One of the more interesting things is when the Soviet army reached

places like Poland--Poland was the most dramatic one--soldiers couldn't

believe the standard of living in Poland. Some of the natives responded to this

and said: You should see Belgium. You think Poland's rich? When they get to

Germany, they also were shocked at how rich it was, but they got comforted

by the fact that, well, of course Germany was rich because they stole

everything. They couldn't imagine that Germany could be a productive

economy, anything like what they saw, because what they knew in their

home life was so miserable. Guest: I think there's some truth to that. Soviet

GDP in 1985, 1987, was probably exaggerated because a lot of things were

so low-quality. Russ: Or unvalued. They had output, but they attached a

number to it that people didn't. Guest: They produced a lot of tax. We put

tax in our GDP, so they can put tax in their GDP. Russ: Fair

enough. Guest: Their cars were crappy, very crappy, that's for sure. But it

wasn't pure measurement. They were the first ones to send a dog into space.

They were the first ones to send a man into space. So, they could do certain

things by sheer force and coercion. But they couldn't produce a decent

car. Russ: And they couldn't produce the right amount of toilet paper,

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either. Guest: Yeah. Pins. They couldn't produce the right sized pins.

51:41 Russ: What are the implications of your approach for foreign aid? There's a

big debate; we've had Paul Collier on here, William Easterly. Obviously there's

a lot of debate in the literature and the policy space about whether aid works

or not. What can we learn from your work about foreign aid?Guest: I think

the most important thing is that it's just a secondary debate. It's not the first

thing we should be debating about development. Foreign aid cannot be the

solution. It's obviously not the source of the ills; it's not the reason why

places are less developed. And it cannot be the solution. First of all, how can

you have solutions to deep institutional problems from the outside, from

thousands of miles away, by people sending money? But more importantly, if

you throw money into an unchanged institutional structure, nothing is going

to change. We are seeing that in the context of Afghanistan in the United

States. The United States has done much more than just sending foreign aid,but it has done it within a given institutional structure; and unless that

institutional structure changes or unless you have a strategy for changing it,

which just doesn't work in general unless there are some exceptional

circumstances, it's not going to work. So if the problems start with the

institutions, therefore the solutions have to come to grips with those

institutions. And unfortunately there are no silver bullet solutions for changing

those institutions. Russ: What do you think about this argument that aid

actually is counterproductive because it enhances the power of the extractive

authoritarians? Guest: I think there is some of that. If you look at the aid

that Mobutu received, obviously counterproductive. On the other hand, inAfghanistan, some of that aid actually went to build school. Russ: I don't

know if it helped institutions.Guest: No, it did not help

institutions. Russ: Excuse me--I don't know if it helped education, is what I

meant to say. I remember a reporter once asked me if I was in favor of

sending money abroad to help build schools. I mean, who could be against

that? And I said: We can't even figure out how to spend money in our own

country to increase education. We're good at spending money on education to

help schools, but to actually make kids learn more seems to be a little bit

trickier. And to expect to do it from a distance. Guest: There's a little

wastage. So, people I trust, when they calculate how much of a dollar

actually reaches destinations, it's between $.10 and $.20. But still, I think

some parts of the world are so poor--Haiti is so poor--that even if a little bit

of it gets wasted--10 cents or 20 cents is not so bad. But who am I closest to

if I take Easterly versus Sachs? Of course I'm much closer to Easterly. But I

think Bill [Easterly] would also say foreign aid is a source of ill. I would say

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foreign aid has been a source of ill in some places but in most places it's done

a minimal amount of good because it's transferred resources to places that

are most in need. But it's not part of the solution. Russ: You said there's not

much we can do to shape institutions. Guest: I think there's not a silver

bullet we can use. But there are obviously certain things that we can do to bea positive force toward institutions. Russ: What are those? Guest: In Syria,

the regime is killing people and trying to help the resistance in one way or

another, trying to reduce bloodshed, those are obvious things you can do. In

Egypt, we have not been very successful, but the intention was actually good.

U.S. and others tried to build civil society organizations, give support to the

formation of political parties and pro-democratic governments; and many of

them ended up in jail. But those are the kinds of things that we can do. Those

are small things. They are not going to be game-changers, but they are

certainly--there is every reason for the United States and Europe not to be

disengaged with the developing world. But we don't have silver bullets. Wecannot change the domestic political economy, political equilibrium with a

push of a button.