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Capital and collusion Essay (Book Review)


Introduction

The author’s purpose for writing the book was to demonstrate how developing nations’ political, social and economic institutions contribute to their state of underdevelopment. His method was to establish a theory concerning underdevelopment and then use case study comparisons between strategies in various developing nations (Latin America, Pakistan etc) and the established standards for development in successful nations.

The author’s theories are derived from an analytical framework of risk, uncertainty, trust and social progress. He then forms a link between these frameworks by illustrating that leaders in developing nations have incentives to sustain national failure as they benefit from it.

The author argues that in developing nations, trust is imperative in the development cycle. However, because there is a divide between uncertainty and risk, then few incentives for innovation and entrepreneurship exist among these nations.

Book summary

The first part of the book gives an outline of the author’s basic arguments. Root (2005) starts with definitions of uncertainty and risk. He explains that risk is quantifiable while uncertainty is not. He further adds that the problem in developing nations is not the lack of capital as most economists would argue.

Instead, it is the divide between uncertainty and risk that leads to these challenges. Developing countries lack the tools needed to asses risk and therefore protect themselves against risk. Such a state of affairs stifles innovations and minimizes entrepreneurship ventures as most people are willing to forego risks when they are not known. The author believes that most individuals in the developing world are economically conservative.

They lack the basic structures need to insure their social and private needs. Households in this area must use most of their resources to get basic services; they have minimal finances left to enlarge their frame of reference. Uncertainty in this part of the world keeps developing nations trapped in their cycle of poverty.

Nonetheless, not all citizens in these nations object to uncertainty. Political agents profit from it because an uncertain climate facilitates minimal accountability. A leader can do what he wants, and no one would question him about it. Most international institutions like the IMF argue against political interventions, yet these are the root of the problem in developing countries.

Leaders in all developing countries have the unique opportunity of changing uncertainty into risk, and this would foster growth. However, those leaders benefit from the status quo. Consequently, it is unlikely that they would make positive economic reforms. If these leaders facilitate broad access to resources, then they will loose their leverage and become unnecessary.

Developing countries also lack the kind of political and social institutions needed to quantify uncertainty. Therefore, market participants find it difficult to agree on any trade terms. As a consequence, most of these parties end up engaging in short terms exchanges so as to reduce their exposure to risk. This preference for minimal and short-term goals stifles innovation and keeps developing nations in their present economic conditions.

The author identifies three types of uncertainties in the book and they include social, political and market uncertainties. Market and political uncertainties in developing nations are manifested through minimal contract compliance among trading partners. Furthermore, the prevalence of capital for investment is minimal in these countries because financial institutions have no basis for assessing the credit worthiness of an entity.

Many investors in developed nations tend to avoid risk by diversifying their portfolio. They do this by accessing other people’s resources through the stock market. In developing nations, few mechanisms for contract enforcement exist; therefore, investors fear surrendering their rights for the collective good, and this leads to less economic expansions.

The benefits of diversification are far removed from persons in developing nations because they prefer risk aversion to resource pooling. It is the lack of trust amongst members of these communities that prevents them from engaging in meaningful economic activities.

Social polarization is another reality that pervades the developing world. Most governments make policies in order to strengthen their political agendas. Since risk prevention can best be done through a consensus on the budget, then a polarized society is not in a position to achieve this.

Sometimes social goods are required for the long term use and efficiency of traders. However, polarization prevents economic and political stakeholders from agreeing on the priority issues. This leaves developing nations with minimal infrastructural and social changes.

Most developing nations are also characterized by the existence of autocratic governments. Root (2005) argues that there is a direct correlation between autocratic rule and underdevelopment. He explains that most autocratic leaders use government policies as loyalist currencies. They reward their supporters with economic gains. This places politicians at the centre of the market, and there is no way of understanding risk in such economies.

Several parties in these nations prefer government protection through price controls, monopolistic markets as well as subsidies for their survival. That requirement breeds an environment of misinformation amongst the masses. There is a deep asymmetry of information between the private and public sectors in those countries. Since no institution can hedge or insure against government involvement, then businesses are left on their own.

Few people have the information they need about opportunity thus leading to minimal private capital for investment. If no information exists, then no uncertainty quantification can transpire, hence minimal economic activities can occur. Some countries such as the Asian tigers may have tried to invest in technology by their weak financial systems still stifle them. Therefore, the author believes that members of developing nations are uncertain about their future.

They try to minimize that uncertainty by pursuing short-term goals, which impedes capital accumulation. Most conclusions from the book are drawn from a number of countries like China, Pakistan, India and Latin American countries. Each of these nations exhibits some of the above-mentioned traits in one way or another. Therefore, it is the tough balancing act between competition and collusion that minimizes development in these states.

Book Analysis

The author appears to have a firm knowledge of his subject matter. Furthermore, he has a clear thesis statement and purpose at the beginning of the book and follows through with the thesis through various case studies. In certain instances, he quotes statements made by other authors on the same and thus proves that his assertions are founded on a strong theoretical framework. He also uses a series of tables and figures to make his points.

However, the author could have been more careful with his choice of tables and figures. Most graphical representations were done in order to reinforce what was already known about certain countries. For example, one can find information about China’s government revenue on page 211 or about Literacy rates in Pakistan and other South Asian literacy rates such as the ones found on page 158.

These facts are already known and do not need to be reemphasized by diagrammatic illustrations. Instead, he should have used more of these diagrams to support his thesis. One way in which he achieves this is through the use of figures concerning bank ownership in China.

The author explains that the poor development of financial institutions in China (as witnessed through the dominance of four major banks) reduces the sectors’ accountability. Lack of transparency translates into more uncertainty hence stifled economic growth. His thesis was supported through an illustration on page 209. However, this proper use of figures was less prevalent in other parts of the book.

Despite these minor shortcomings in the book format, one must not undermine the author’s success in meeting his purpose. His use of historical and current economic trends in several developing and developed nations is what facilitates this outcome. Furthermore, the writer did not just restrict his analysis to developing nations, he often compared their performance to that of developed nations, and thus drew conclusions.

For example, when talking about the problem of underdevelopment in Japan and South Korea, the author identified the prevalence of closed economic systems as one of the major challenges in development. He explained that existence of social networks and kinship ties such as keiretsu and chaebol facilitated economic growth during the 1990s. He argued that this may have worked for the tigers at a certain point in time, but it failed when international players entered their markets.

They complained about exclusion and economic injustice as they did not belong to the family-based networks. Root (2005) then concludes that the Asian tigers’ greatest strength eventually became their greatest weakness. He then supports this statement with a short historical analysis of the US.

The country was characterized by family–owned businesses during the initial stages of capital accumulation. However, as the market advanced, then more publically owned corporations got into the scene. It was desirable to have family-owned businesses in order to build trust in the market.

When institutional structures came into being, it was no longer necessary to have these types of collusions as they minimized a company’s ability to grow. The amount of resources that existed in family businesses could not be compared to those ones in the stock market. This author carefully draws similarities between current developing nations and best practice standards from developed nations in a relevant and clear manner.

It is also admirable how this author managed to find different kinds of collusions in the case studies he selected. For example, in Pakistan, he believed that collusions were created by political machineries which considered incentives for development as an impediment to their political goals. The lack of incentives for development led to failed public institutions and this perpetuated underdevelopment. In India, he identified the collusion as the patronage machine that others call the government.

In this scenario, the administration fostered economic growth amongst the elite and ignored the needs of the masses. This collusion meant that the masses’ social and political risks were ignored. As such, the country’s majority was entrenched in poverty. In China, the collusion occurred between the banking sector and its stakeholders.

The country had minimal structures to hold its institutions accountable, which contributed to their economic predicaments. These divergent case studies were quite appropriate to the issue of collusion and thus demonstrated the author’s prowess.

The most important quality found in this book is its ability to explain discrepancies in competition, collusion and capital accumulation. Root (2005) did not place himself in a trap by making a sweeping statement about underdevelopment. He was open to the fact that cultural differences determine one’s economic outcomes. This explains why collusions can sometimes be effective in one country and fail in another.

The author explains that when uncertainty about contracts exist in one country, then collusions would be imperative. However, when institutional structures are strengthened, then no need for collusions exists. He, therefore, accounts for discrepancies in his declarations by showing how a county’s stage of development relates to its prevailing economic performance.

Conclusion

The author’s thesis was supported throughout the book by his case studies. He asserted that the gap between risk and uncertainty in these countries is what leads to their perpetual state of underdevelopment. In Latin America, Pakistan and India, the central role of political actors in economic markets minimizes people’s ability to get information about opportunity, i.e. uncertainty is high.

Consequently, the masses are prevented from engaging in economic ventures. In China, the problem is the lack of strong financial structures. This means that the country cannot deal with uncertainties in the future and that keeps investors out. The author’s firm reliance on other theoretical findings and historical occurrences makes his arguments quite convincing. It offers solutions to prevailing economic inadequacies in these nations.

Reference

Root, H. (2005). Capital and collusion: the political logic of global economic development. Princeton: Princeton University press.

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IvyPanda. 2019. "Capital and collusion." May 21, 2019. https://ivypanda.com/essays/capital-and-collusion-book-review/.

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IvyPanda. (2019) 'Capital and collusion'. 21 May.

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