Why External Dependency Leads to Bad Government
“There is no way of explaining the extreme poverty of many nations without taking into account the extent to which they are misgoverned.” — Mancur Olson
In Power and Prosperity, Mancur Olson posed the following provocative but fundamentally important question: In what way is government different from a protection racket?
Consider the essence of government’s relationship to the governed. Citizens pay taxes to the government. In return, at minimum, the government keeps away competing gangs (in particularly, governments of “foreign” countries and organized criminals of various types that would compete with the government). Bad governments, like predatory wolves, just take from the people. “Good governments,” like shepherds, realize that citizens will provide more reliably if they are, in turn, taken care of; so the good governments provide services to citizens and seek to ensure that the society functions smoothly. Note that this form of “good government” has nothing to do with altruism, and everything to do with the logic of criminality: as Olson notes “other things being equal, a criminal is better off in a rich society than in a poor society: there is more to steal.” (p. 3) The same is true for the “stationary bandit” called the government:
A stationary bandit has an encompassing interest in the territory he controls and accordingly provides domestic order and other public goods. Thus, he is not like the wolf that preys on the elk, but more like the rancher who makes sure his cattle are protected and given water. (p. 11)
Clearly, societies that experience such a transition from outright predation to (metaphorical) animal husbandry become better off but, according to Olson, the mechanism by which this occurs has nothing to do with good intentions. Rather, it is the work of an “Invisible Hand” — not the derivative, Adam Smith version, but the original version articulated by Montesquieu: “a force that makes men pursuing their private passions conspire unknowingly toward the public good.” [1]
Indeed, quite recently, commentators have described China’s remarkable resurgence — as well as the comparably impressive advances made in Singapore — as examples of an “Asian model” of development in which the all-encompassing control of the government creates an all-encompassing interest in national success. (That this view is mistaken does not diminish its currency.) While generally conveyed as a contemporary insight, this argument is not new. Over two centuries ago, Simon Nicholas Henri Linguet argued that a sovereign with complete control over his dominion will act with concern for the interests of citizens. With reference to Imperial China, he states
Asian despotism … does not at all favor tyranny contrary to what many think; it imposes on the kings obligations that are narrower than the so-called dependence in which some would like to place them in relation to their own vassals. [The ideal system] does not advise them to be just; it forces them to be so. (p. 99)
In other words, the argument goes, because the government effectively owns the entire country it cares about the entire country. In totalitarian circumstances, Linguet argues that poor governance works against the direct interests of those governing.
It is fair to say that Linguet’s unvarnished theory of totalitarian beneficence has not survived the test of time very well. Consider the two failed attempts at the mass collectivization of agriculture in the Soviet Union (1932–1939) and in China (1959–1962), which together resulted in the deaths of over 40 million people, making these large-scale economic experiments among the most costly human calamities of the twentieth century (ranking only beyond only the Second World War and the Spanish Influenza of 1919).
So, in literal terms, Linguet has turned out to be just plain wrong. But that doesn’t mean his theory is completely devoid of insight.
Consider the story of Feng Yuxiang, an early 20th-century Chinese warlord, told by Mancur Olson in the opening chapter of Power and Prosperity. At that time, China was in a state of controlled anarchy not unlike what we see in Afghanistan and many other parts of the world today, with different domains of the country under the control of various warlords. Feng was brutal and efficient in his administration of the domain under his control. He taxed local residents heavily both to support his own narrow interests and to defend his territory from incursions by a small army under the direction of a notorious roving bandit by the name of White Wolf.
Contrary to expectation but consistent with the Linguet’s iconoclastic theory, the historical record indicates that Feng was not hated by the residents of the area under his control. To the contrary, those who were subjected to his brutal rule appear to have preferred life under his dominion to the alternative — which was exposure to White Wolf. As Olson observes:
There is good reason for this preference… There is little protection in an anarchy and thus not much to steal. If the leader of a roving bandit gang who finds only slim pickings is strong enough to take a certain territory and to keep other bandits out, he can monopolize crime in that area — he becomes a stationary bandit. The advantage of this monopoly over crime is not mainly that he can take what others might have stolen: it is rather that it gives him an encompassing interest in the territory [since] he is the only one who is able to tax or steal in the domain in question. (p. 7)
According to this line of argument, somewhat reminiscent of Hobbes’s Leviathan, any form of rule is preferred to lawlessness because, under lawlessness, the roving bandits that will inevitably appear will have no incentive to leave anything standing after they attack. In contrast, the stationary bandit will be back next week to plunder further, so he has an interest in ensuring that his subjects are protected. In fact, he might even invest in projects that benefit the society as a whole, so that the base of wealth available for theft (or taxation) is correspondingly increased.
The power of this original “Invisible Hand” goes even further when we allow citizens a choice of where to live. Given such a choice, we expect that citizens will prefer to be ruled by better rather than worse governments. If freedom of movement exists — either through actual migration or the movement of capital — people will vote with their feet or their investment dollars. As a consequence, places that are well-governed are enriched, and places that are poorly governed are further impoverished. Similarly, autocrats who fail to accurately gauge the capacity of citizens to fill the coffers risk building empires on unsustainable foundations. Historical examples of both of these theorized outcomes abound.
The movement of capital has a similar effect. When citizens are either subject to high tax rates, or faced with unreliable or low returns at home because their poor governments provide inadequate public services, they will seek to invest their money in places that either have lower tax rates, or are better governed, or both. This is exactly why the introduction of bills of exchange constituted such a dramatically democratizing innovation.
There is problem with this historically-based analysis, however: In the 21st century ruling elites, and the political leaders who represent them, are the first, rather than the last, to discover that people and capital are mobile. This fact reverses all the benefits of human and capital mobility described above, and creates the context for an insurmountable curse.
How is this? Imagine a world where the sovereign doesn’t need citizens to pay taxes. That is, the country’s wealth lies elsewhere and, once extracted, it can safely be stowed in a bank account far away. Where might the wealth of a country be situated, if not in the capabilities of its citizens? Well, it could be underground, in the form of gold, diamonds, oil, or natural gas. It could be in the fields, in the form of poppy for heroin. Or it could be in the form of international wire transfers — overseas direct assistance sent from a government or international organization in a rich country to a government in a poor country.
Whether the source of government revenue is extracting natural resources, trafficking in narcotics, or pleading for aid, it has the same impact on governance: it undermines even the rudimentary incentives for investment in public goods possessed by the stationary bandit. Once capital is mobile and the resources to govern come from external sources, then citizens no longer matter.
The rancher becomes a wolf, and turns on his herd; the stationary bandit reverts back into a roving bandit.
[1] Albert O. Hirschman, The Passions and the Interests: Political Arguments for Capitalism before Its Triumph, p. 10.
