my chat with GPT on AJR

I am really beginning to enjoy chatGPT which by the way seems way ahead of Google Gemini and Microsoft Copilot. While I still it routinely getting citations wrong and pulling up non-existent titles or combinations of titles and authors, the basic info is right. In this case, while I am not an economic historian, econometrician, political scientist, sociologist, anthropologist each of which would bring its own critiques of AJR's work even if they agree with overall broad message as I understand that institutions matter - I nevertheless wanted to ask some simple questions of whether AJR's theory might  explain a few observations. I share my chat from the point where it mentioned the case of North and South Korea prior to which I was just asking it to explain their work.

My four questions were

1. Has the example of east and west germany been used to show AJR's findings like North and South Korea?
2. But both in the case of korea and germany - it could be simply explained as a difference between capitalism and communism which are institutions indeed but we don't need AJR for that, do we?
3. How is the case of the state of Kerala and West Bengal within India which has seen communist governments elected by democratic processes for over 50 years explained by AJR? these two states have three of the four attributes of inclusive institutions
4. Again all these ways of defining institutions seem like ex post justification and hence the framework has low predictive power

I am not qualified to comment on the quality of AJR or GPT's response and so not attempting to summarize. But I find this incredibly valuable, a notch above anything out there like a Wikipedia summary or even an opinion article or commentary in an economic journal because I am able to interact and ask follow up questions instead of just read any one or few persons' review as a non-expert and ask intermediate to advanced level questions. The answer to my last question was really telling for me.

The responses of GPT are below

You said:

Has the example of east and west germany been used to show AJR's findings like North and South Korea?

ChatGPT said:

ChatGPT

Yes, the case of East and West Germany has been used as an example to support Acemoglu, Johnson, and Robinson's (AJR) findings, similar to the more prominent case of North and South Korea. Both cases involve countries with shared historical, cultural, and geographic backgrounds that were divided by external forces into two separate states with drastically different institutional frameworks, making them powerful natural experiments for studying the effects of institutions on economic outcomes.

The Germany Example: East vs. West Germany

Background

• Pre-division similarity: Prior to World War II, Germany was a unified country with a common culture, language, and history. Economic development, industrialization, and education levels were broadly similar across what would become East and West Germany.
• Post-WWII division: After World War II, Germany was divided into two separate states as a result of geopolitical agreements between the Allied Powers. West Germany adopted capitalist, democratic institutions under Western influence (primarily the U.S., U.K., and France), while East Germany came under the control of the Soviet Union and established a communist, centrally planned economy with authoritarian governance.

Institutional Differences

• West Germany (Federal Republic of Germany): West Germany embraced inclusive institutions, characterized by a market economy, property rights, political pluralism, and democratic governance. These institutions encouraged private enterprise, innovation, and investment, resulting in sustained economic growth and rising living standards.
• East Germany (German Democratic Republic): East Germany implemented extractive institutions, with state ownership of industry, centralized economic planning, limited personal and political freedoms, and authoritarian rule. These institutions limited private initiative, reduced economic incentives, and led to inefficiencies in resource allocation.

Economic Outcomes

• By the 1980s, there was a stark contrast between the economic outcomes of the two regions:
• West Germany became one of the world’s largest and most prosperous economies, with high standards of living, strong industrial growth, and vibrant political and civil institutions.
• East Germany lagged significantly behind, with lower productivity, stagnating industrial output, and widespread economic inefficiency. Living standards in East Germany were far below those in the West.

These divergent outcomes between East and West Germany align closely with the core argument made by AJR: that inclusive institutions promote economic development by creating an environment that fosters investment, innovation, and growth, while extractive institutions stifle development by concentrating power and resources in the hands of a few, reducing economic incentives for the broader population.

Reunification and Long-Term Effects of Institutions

The reunification of Germany in 1990 provided a rare opportunity to observe the long-term effects of institutional differences on economic outcomes even after the political divide ended.

• Post-reunification divergence: After reunification, despite significant financial support from West Germany and massive investment in infrastructure, East Germany continued to lag behind economically. This persistent gap can be interpreted as evidence of the long-lasting effects of extractive institutions on development, even after they are replaced by more inclusive institutions.
• Labor market differences: Even decades after reunification, East Germany has experienced lower wages, higher unemployment, and lower productivity compared to the West. This suggests that the institutional legacy of communism created persistent economic and social challenges, consistent with AJR’s theory that institutional differences leave long-lasting scars on economic performance.

Studies and Use of the Germany Example in Literature

Several studies have drawn on the East and West Germany case to test AJR's theories about the role of institutions in economic development:

1. Fuchs-Schündeln and Schündeln (2005) used the German division and reunification as a natural experiment to explore the effects of different economic systems on preferences, savings behavior, and economic outcomes. Their findings show that individuals who lived under East German (extractive) institutions had different economic behaviors and preferences compared to those in the West, supporting the view that institutional differences shape not only economic outcomes but also individual preferences and economic behavior over time.
2. Alesina and Fuchs-Schündeln (2007) examined how the experience of living under the communist regime in East Germany affected people's political and economic preferences even after reunification. They found that East Germans remained more in favor of government intervention in the economy, suggesting that institutional legacies have deep cultural and behavioral effects, which are consistent with AJR's emphasis on the persistent influence of institutions.
3. Nunn (2009) explored the long-run effects of institutions, and the Germany example (alongside other case studies) has been cited as an illustration of how institutional divergence can lead to starkly different development outcomes in otherwise comparable regions.

Conclusion

The division of Germany into East and West serves as a compelling real-world case that echoes the lessons from North and South Korea. Like Korea, the Germany example provides strong support for AJR’s theory that inclusive institutions promote economic growth, while extractive institutions hinder it. Moreover, the persistence of economic disparities between East and West Germany even after reunification further strengthens AJR’s argument that the effects of institutions are long-lasting, and that institutional legacies can continue to affect economic performance even after formal institutional changes.

Thus, the Germany case, along with other examples, has been used to confirm and extend AJR's findings through natural experiments that provide a robust test of their institutional-development hypothesis.

4o

You said:

But both in the case of korea and germany - it could be simply explained as a difference between capitalism and communism which are institutions indeed but we don't need AJR for that, do we?

ChatGPT said:

ChatGPT

You're right to point out that the cases of East vs. West Germany and North vs. South Korea could be seen as examples of the broader ideological and economic competition between capitalism and communism. These systems are, indeed, different types of institutions, and one might argue that the divergence in economic outcomes can simply be explained by the well-known differences between capitalist market economies and centrally planned communist systems. So, why are these cases relevant or important to the framework proposed by Acemoglu, Johnson, and Robinson (AJR)?

The Value of AJR’s Framework Beyond Capitalism vs. Communism

While the contrast between capitalism and communism is an important aspect of the economic differences observed in these cases, AJR's framework provides additional depth and explanatory power that goes beyond a simple ideological comparison. Here’s why their approach is significant:

1. Broader Definition of Institutions

• AJR’s definition of institutions is broader than the distinction between capitalism and communism. They emphasize the role of inclusive vs. extractive institutions as the key determinant of economic success or failure. Inclusive institutions are not synonymous with capitalism, nor are extractive institutions identical to communism. Inclusive institutions:
• Allow broad participation in economic and political processes.
• Protect property rights.
• Ensure rule of law.
• Provide incentives for innovation and investment.
• On the other hand, extractive institutions are those that concentrate power and wealth in the hands of a few, limit political and economic freedoms, and undermine broad-based participation.
• Capitalism can operate within both inclusive and extractive frameworks (e.g., crony capitalism vs. liberal market economies), and communism can similarly exhibit variation in institutional quality (though most communist systems have tended to be extractive). AJR’s focus is on how the structure of institutions, rather than just the label of the system (capitalism vs. communism), shapes economic outcomes.

2. Historical Persistence of Institutions

• AJR’s framework also emphasizes the historical persistence of institutions. While communism vs. capitalism might explain the economic divergence during the Cold War, AJR’s analysis sheds light on why certain institutional legacies persist long after regime changes. For example:
• East Germany’s economic lag after reunification cannot be entirely explained by the end of communism, as AJR would argue that the institutional legacy of extractive governance has left lasting scars, affecting economic behavior, productivity, and social norms even after formal reunification.
• Similarly, in North Korea, the institutional framework of extreme authoritarianism and centralized control has left long-term impacts that wouldn’t disappear merely by transitioning to capitalism.
• AJR’s emphasis on the long-run persistence of institutional differences helps explain why quick changes in political or economic systems (e.g., communism to capitalism) do not necessarily lead to immediate convergence in economic performance. Institutions leave behind deep-rooted structural effects that can take decades, if not centuries, to overcome.

3. Mechanisms Behind Economic Divergence

• AJR provide a detailed account of why inclusive institutions foster growth, including mechanisms such as:
• Incentives for innovation and investment: Inclusive institutions encourage individuals to invest in human capital, technology, and new businesses because they are confident their rights will be protected. This mechanism applies to both capitalist and non-capitalist societies, and it is not simply about free markets, but about ensuring that people can reap the rewards of their investments.
• Checks on power: AJR emphasize the importance of political inclusivity as well. In West Germany and South Korea, political institutions were more inclusive and democratic, which provided stability and helped sustain economic growth. By contrast, East Germany and North Korea were characterized by authoritarian, extractive political institutions that undermined economic dynamism.
• Simply attributing the differences to capitalism vs. communism doesn’t explain the specific mechanisms through which inclusive institutions lead to economic prosperity.

4. Applicability Beyond Cold War Cases

• While East vs. West Germany and North vs. South Korea might seem like straightforward cases of capitalism vs. communism, AJR’s framework applies to a much broader range of historical and contemporary examples where capitalism vs. communism isn’t the issue:
• Colonialism: AJR’s use of colonial legacies (e.g., settler mortality) to explain institutional divergence in countries across Africa, Latin America, and Asia highlights how differences in institutional quality (not capitalism vs. communism) explain why some former colonies succeeded and others failed economically.
• Pre-modern examples: AJR also apply their theory to explain divergence in long-run economic development even before capitalism and communism existed (e.g., why the Venetian Republic thrived with more inclusive institutions, while other feudal systems stagnated).
• The robustness of AJR’s framework across different historical and geographical contexts gives it greater explanatory power than simply invoking the capitalism vs. communism distinction.

5. Communism and Extractive Institutions

• While communism often fits the description of extractive institutions due to centralized control and lack of economic freedoms, AJR’s theory is more nuanced. Not all extractive institutions are communist, and not all inclusive institutions are capitalist. For example:
• Crony capitalism (e.g., in some autocratic regimes) is a form of extractive institution where political elites capture economic gains, limiting broad-based development, even in nominally capitalist economies.
• Meanwhile, some non-capitalist societies with inclusive political institutions (e.g., certain indigenous or communal economies) have fostered sustainable development without capitalism, though they are rare.

Conclusion: Why AJR’s Framework Adds Value

In short, while capitalism vs. communism can explain part of the economic divergence in cases like Germany and Korea, AJR’s framework provides a more detailed, generalizable explanation that:

• Focuses on the inclusive vs. extractive nature of institutions.
• Explains why institutions persist and how their legacy affects long-term development.
• Identifies the specific mechanisms through which institutions affect economic outcomes, beyond just the economic system (e.g., incentives, property rights, rule of law).
• Applies to a wider range of cases beyond the Cold War context, making it a more versatile and comprehensive theory.

Therefore, while AJR’s findings certainly align with the capitalist-communist divide in these two cases, their approach offers a deeper understanding of the institutional foundations of economic development.

You said:

How is the case of the state of Kerala and West Bengal within India which has seen communist governments elected by democratic processes for over 50 years explained by AJR? these two states have three of the four attributes of inclusive institutions

ChatGPT said:

ChatGPT

The cases of Kerala and West Bengal, both of which have had communist governments elected through democratic processes for long periods of time, present an interesting challenge to Acemoglu, Johnson, and Robinson’s (AJR) framework. These states have three of the four key attributes of inclusive institutions—broad political participation, democratic governance, and rule of law—yet have maintained governments rooted in communist ideology, which typically aligns with extractive economic systems (such as central planning and state ownership). Understanding these cases within the AJR framework requires examining the nuance of how inclusive political institutions can coexist with economic systems that limit certain market freedoms, and how the performance of these states aligns with or challenges AJR’s predictions.

AJR’s Framework and the Cases of Kerala and West Bengal

According to AJR, inclusive institutions are characterized by:

1. Broad political participation, allowing citizens to participate in decision-making processes.
2. Secure property rights that protect individual investments and innovations.
3. Rule of law that ensures fairness and accountability.
4. Incentives for innovation and investment, supported by market-driven economies.

In the case of Kerala and West Bengal, the first three attributes largely hold true, while the fourth—economic incentives based on market principles—has been more restricted due to the communist policies in these states. Let’s break down the two cases.

1. Kerala: Inclusive Institutions with Leftist Economic Policies

Political Inclusivity and Democratic Governance

• Kerala has had democratically elected governments led by the Communist Party of India (Marxist) (CPI(M)) since the 1950s, with regular free and fair elections. The state enjoys high levels of political participation, with one of the most active and engaged civil societies in India.
• The rule of law in Kerala is generally strong, and the state has a reputation for good governance, which includes public service delivery, transparency, and accountability. These are key components of inclusive political institutions according to AJR’s framework.

Economic Policies and Development

• Despite being governed by a communist party, Kerala’s economic policies have focused on redistributive welfare measures, including significant investments in healthcare, education, and social services. The state has some of the highest human development indicators in India, with very high literacy rates, life expectancy, and relatively low levels of poverty compared to the national average.
• Kerala’s economic policies have traditionally been more state-oriented, with a focus on public ownership in key sectors, regulation of the labor market, and protections for workers’ rights. However, the state has not implemented classic Soviet-style central planning but rather a mixed economy with significant state intervention in social services and labor rights.

Explaining Kerala through AJR’s Lens

• Inclusive political institutions: Kerala has strong, inclusive political institutions, with high levels of political participation, democracy, and the rule of law.
• Limited extractive economic policies: While some communist economic policies could be seen as extractive (e.g., government control over land reforms, labor regulations), they have not fully undermined the broader inclusivity of the state’s governance. Moreover, these policies have been geared toward welfare and redistribution, which, in some cases, has complemented inclusive political institutions by raising living standards and human development.
• Human capital development: Kerala’s investment in human capital (education and health) has provided the population with the incentives and capacity to innovate, despite the state's reluctance to fully embrace market-driven reforms. AJR argue that human capital and technological innovation are crucial for long-term development, and in this sense, Kerala’s focus on education fits well with AJR’s theory of inclusive institutions fostering development.

Thus, Kerala fits into AJR’s framework primarily through its inclusive political institutions and human capital investments, which have compensated to some degree for its relatively state-controlled economy. This makes Kerala a case where inclusive political institutions have led to relatively positive development outcomes even without fully market-driven economic policies.

2. West Bengal: Political Inclusivity with Less Economic Dynamism

Political Participation and Democratic Governance

• Like Kerala, West Bengal has had long periods of communist rule under the CPI(M), with democratically elected governments from 1977 until 2011. The state has also upheld democratic norms and allowed broad political participation.
• West Bengal has a relatively strong tradition of rule of law and civil liberties, fitting the inclusive institutions model politically. However, the political landscape in West Bengal was also characterized by a significant role of trade unions and party control over many aspects of social and economic life, which limited the pluralism of the state's politics to some extent.

Economic Policies and Development

• Economically, West Bengal followed more traditional communist economic policies, focusing on land reforms and rural development in the early years of CPI(M) rule. The state was more hesitant to embrace market reforms compared to other Indian states, resulting in relatively low levels of industrial growth and private investment.
• Unlike Kerala, West Bengal’s human development indicators have been less impressive, and the state’s growth rates were generally lower compared to states that embraced pro-market reforms. The agricultural sector remained dominant in the economy for a long time, and despite some early successes in land redistribution, West Bengal struggled to attract industrial and technological investment.

Explaining West Bengal through AJR’s Lens

• Inclusive political institutions: West Bengal, like Kerala, had inclusive political institutions with democratic governance, broad political participation, and rule of law. However, political inclusivity alone did not lead to sustained economic development because the state’s economic policies were more extractive than those of Kerala.
• Limited economic incentives: The lack of economic incentives for private enterprise and innovation, combined with strong state control and heavy regulation of industry, hindered the kind of dynamic growth that AJR associate with inclusive economic institutions. West Bengal’s reluctance to adopt market-friendly policies limited its economic development, even though its political institutions were relatively inclusive.
  This fits with AJR’s theory that both inclusive political and economic institutions are necessary for sustained economic development. In the case of West Bengal, inclusive politics alone was not enough to foster growth without the corresponding economic incentives for innovation and investment.

AJR’s Theory in the Context of Kerala and West Bengal

In AJR’s framework, inclusive political institutions are necessary but not sufficient for long-term economic development. Inclusive economic institutions—which promote market competition, protect property rights, and encourage investment and innovation—are also crucial.

• Kerala has seen relatively positive development outcomes because its inclusive political institutions were accompanied by heavy investments in human capital and relatively effective governance, despite its more socialist economic policies. In this way, Kerala aligns with AJR’s theory to some extent, as its human development focus has mitigated some of the limitations of its economic model.
• West Bengal, on the other hand, has not experienced the same level of development, as its more extractive economic policies (lack of economic incentives and industrial stagnation) have prevented the state from realizing its full growth potential, despite having inclusive political institutions. This supports AJR’s argument that inclusive economic institutions are just as important as inclusive political institutions for long-term prosperity.

Conclusion: Nuance in AJR’s Framework

The cases of Kerala and West Bengal show that AJR’s framework is flexible enough to account for the coexistence of inclusive political institutions with varying economic outcomes, depending on the degree to which economic institutions foster innovation and investment. In Kerala, human capital development and social services have partially compensated for less market-friendly policies, while West Bengal’s lack of economic dynamism fits AJR’s prediction that inclusive politics alone does not guarantee development without corresponding economic incentives.

4o

You said:

Again all these ways of defining institutions seem like ex post justification and hence the framework has low predictive power

ChatGPT said:

ChatGPT

Your critique raises an important concern about the predictive power of Acemoglu, Johnson, and Robinson's (AJR) framework for understanding the role of institutions in economic development. The idea that institutions can be defined and evaluated after the fact (ex post) could indeed suggest that the theory is more descriptive than predictive, which raises challenges for its robustness and general applicability. This criticism has been shared by other scholars, and it speaks to the difficulty of making institutional theories truly testable and falsifiable.

Let’s explore this issue in more detail:

1. Post-Hoc Justification: A Common Critique

One of the main critiques of AJR’s framework is that the distinction between inclusive and extractive institutions can be applied retroactively to almost any case, explaining success or failure by identifying the institutions that were in place, after the outcomes are already known. For example:

• If a country succeeds economically, one could argue it had inclusive institutions (protecting property rights, allowing broad participation, etc.).
• If it fails, one could argue it had extractive institutions (concentrating power and wealth, undermining economic incentives).

This raises the question: Can AJR’s theory predict, ahead of time, which institutions will lead to success or failure?

In the case of Kerala and West Bengal, we might say Kerala succeeded because it has "more inclusive institutions" in terms of human capital development and social services, and West Bengal did not because it had extractive economic policies. But these labels can feel arbitrary or adjusted after the fact, making it seem like the theory lacks predictive precision.

2. Challenges with Predictive Power

To truly assess a theory's predictive power, we need it to generate testable hypotheses that can be verified before outcomes are known. The AJR framework faces several challenges in this regard:

• Institutions as broad concepts: The terms “inclusive” and “extractive” are broad and can encompass a wide range of political, social, and economic systems. This flexibility makes the theory adaptable to many cases, but it also risks becoming too vague to make strong, falsifiable predictions. For example, how do we measure whether a specific institution (e.g., a land reform policy) is inclusive or extractive without seeing the outcome first?
• Defining institutional change: AJR argue that institutional change is often path-dependent and shaped by historical contingencies, such as colonial legacies or critical junctures (e.g., revolutions, wars). However, this historical determinism makes it hard to predict when and how inclusive institutions might emerge or transform in a given country. If institutions evolve based on unique historical events, then predicting future institutional development becomes highly uncertain.
• Causal complexity: While AJR’s framework identifies institutions as the fundamental driver of economic outcomes, development is influenced by many factors beyond institutions, including geography, technology, culture, and international trade. Institutions interact with these factors in complex ways, making it difficult to isolate institutional effects and predict future outcomes with precision.

3. Predictive Power vs. Explanatory Power

It’s important to distinguish between explanatory power and predictive power:

• Explanatory power refers to how well a theory can explain past events or outcomes. In this regard, AJR’s framework does a good job of explaining why some countries (or regions within countries) succeeded and others failed. It points to institutional differences that shaped long-term trajectories of growth or stagnation.
• Predictive power, on the other hand, requires that the theory can forecast future outcomes based on present conditions. For example, if we know a country has inclusive political institutions today, can we predict that it will achieve strong economic growth in the future? Or if we observe extractive institutions in place, can we predict a future decline or stagnation?

While AJR’s theory is rich in explanatory power, its predictive power is more limited. This is partly due to the challenge of measuring institutions in real-time and anticipating future political and economic shocks that may disrupt institutional stability.

4. Empirical Validation and Testing the Theory

Some scholars have attempted to test AJR’s framework empirically by using various methods to measure institutional quality (e.g., indicators of political rights, property rights, corruption levels, etc.) and relate these to economic performance. However, this approach has its own limitations:

• Endogeneity: One challenge is that institutions and economic outcomes are often endogenously linked—that is, institutions affect economic outcomes, but economic outcomes also influence the evolution of institutions. This two-way causality makes it hard to establish clear predictions about the future based solely on present institutional quality.
• Long-run focus: AJR’s theory is focused on long-run economic outcomes, which makes it difficult to assess short-term predictions. For instance, a country might have extractive institutions today but still experience periods of economic growth due to temporary factors (e.g., natural resource booms). Over the long run, AJR would predict that growth would stagnate, but predicting the exact timing and extent of such stagnation is difficult.

5. Can We Improve the Predictive Power?

There are ways to try to improve the predictive power of the institutional framework:

• More precise definitions: One way to address the ex post justification issue is to create more precise, measurable definitions of what constitutes inclusive and extractive institutions. For example, instead of saying a country has inclusive institutions if it experiences growth, we could look at specific, quantifiable institutional characteristics—such as judicial independence, property rights enforcement, or the level of political corruption—and establish thresholds for inclusion or extraction.
• Historical analogies: Another way is to use historical analogies to predict institutional change. AJR’s theory of path dependence suggests that once institutions are set on a certain trajectory, they are likely to persist over time. Therefore, we can make predictions by comparing countries with similar historical experiences and institutional legacies. However, this approach still faces the challenge of predicting “critical junctures”—moments of significant institutional change that are often hard to foresee.

6. Example of Kerala and West Bengal Revisited

Let’s return to the cases of Kerala and West Bengal. Could AJR’s framework have predicted their divergent outcomes based on institutional analysis before these outcomes became clear?

• In the case of Kerala, one could argue that the inclusive political institutions (strong democratic governance, broad political participation) and focus on human development could have been predictive of better long-term outcomes, despite the state’s leftist economic policies. However, it would have been hard to predict the exact nature of Kerala’s economic trajectory, particularly in a mixed economy with heavy state involvement.
• In the case of West Bengal, AJR’s framework might have predicted that the state’s reliance on state-controlled economic policies (e.g., land redistribution, state ownership) would limit its long-term growth prospects, even with inclusive political institutions. But predicting the extent of stagnation and the state's inability to attract investment and industry would still have been difficult without more detailed information about the quality of governance and the interaction with other factors (e.g., labor movements, industrial policies).

Conclusion: Limited Predictive Power but Valuable Insights

Your critique highlights a valid concern: AJR’s framework does face challenges in terms of predictive power, partly because it allows for broad, flexible definitions of institutions that can be adjusted ex post. While it offers a valuable explanation for why certain institutional arrangements lead to long-term economic success or failure, it has been less effective at predicting outcomes in real-time.

However, the theory still provides important insights:

• It emphasizes the central role of institutions in shaping economic outcomes, and offers a useful framework for thinking about why some societies succeed while others fail.
• It highlights the importance of historical legacies and path dependence, making it clear that institutional change is slow and often difficult to reverse, which can help guide long-term policy thinking.

For better predictive power, future research might focus on creating more quantifiable, forward-looking measures of institutional quality and on understanding the timing and triggers of institutional change.