Economic Origins of Dictatorship and Democracy

by Daron Acemoglu

  An essential feature of this scenario is that when customers decide to renege on their promise, the outside agency steps in and “enforces the contract.” Without such enforcement, the contract would be worth little. Customers would renege and suffer no repercussions. In economic transactions, such enforcement is sometimes difficult but essentially possible because there is “the state,” with its monopoly of legitimate coercive power and the fact that it delegates this power to other agencies, such as the courts of law, so that they can enforce the contract. In the political realm, however, the groups that control political power are essentially “the state.” Herein lies the problem. When it comes to contracts that the state or social groups controlling the state would like to write with others (e.g., the elites controlling political power in nondemocracy writing contracts with the citizens), they will, by definition, not be enforceable because groups controlling the state cannot commit not to use their power to renege on their promises and change the terms of the contract. This implies that contractual solutions are seldom useful in political-commitment problems because, most often, the agent violating the contract is precisely the party who is supposed to enforce it (Acemoglu 2003a).

  The second possible solution is repeated game interactions. Customers may be deterred from reneging on their promises if they expect to do business with the same traders in the future, and the implicit (or explicit) agreement between them is that if the customers renege on their payments, they will no longer be able to trade in the future. Such repeated game interactions are an imperfect substitute for contracts. They are imperfect because they work only if behavior is sufficiently forward-looking and the rents generated by a continuing relationship are large enough for it to be worthwhile to customers to incur the costs of making the payments today - so that they receive those rents by trading in the future or face the punishment of being excluded from a potentially beneficial relationship. We discuss later how this type of repeated game interaction might help but often falls short.

  This leaves us with the third possibility, which is to take the decision-making powers out of the hands of the customers. If whether the payment will be made is decided by the trader, not the customer, the problem will be solved. One way of doing so in the previous economic example is for the customer to give a postdated check to the trader, who will then cash it on the specified date. It is clearly in the interest of the trader to cash the check because the costs are borne by the customer, and she is the beneficiary herself. In other words, the commitment problem has been solved by removing the decoupling between the identities of the beneficiary of the action, the trader, and the person taking the action, the customer. Now, the trader is taking the action, and she will take the action that is in her interests, solving the commitment problem. Although such simple solutions are not available in the political arena, something similar in spirit may be the most useful remedy: change the identity of who has political power so that there is no longer a decoupling between the beneficiary of the policy and the identity of the group holding political power.

  The commitment problem and how political institutions deal with it is essential for understanding the remainder of the book. In fact, as indicated in our Introduction, the key role of political institutions in our model is to regulate the future allocation of political power; democratization, a radical change in political institutions, arises as a way of transferring political power from the elites to the citizens. The need for such a transfer of power arises from the inherent commitment problem in politics. Like the customer not wanting to make a payment, the elites who hold political power in nondemocracy will not want to make any concessions, such as income transfers, to the citizens. Therefore, with the citizens excluded from the political system, promises of future redistribution and transfers made by the elites are noncredible. By transferring political power to the citizens, democratization is a way of making such promises credible. That democracy itself suffers from commitment problems is discussed in Chapter 7. In a democracy, the majority of citizens may enact policies highly unfavorable to the elites. In response, the elites may threaten to mount a coup, which democrats will wish to avoid by making concessions. Nevertheless, just as elites in nondemocracy may not be able to avoid revolution by making promises because they are not credible, in a democracy it may not be possible to avoid coups by making promises.

  4.2 The Difficulty of Committing Not to Use Political Power

  Before embarking on the formal analysis of commitment in political contexts, we discuss three extended historical examples of how it is difficult for those who possess political power to commit not to use it. We have seen interesting examples and some of the consequences in South Africa. In Chapter 1, we discussed how after the Soweto Uprising of 1976, the white government promised many concessions, including putting a stop to the creation of black homelands. However, once Soweto had been pacified and the threat dissipated, the white government reneged on its promises. Another interesting South African example emerges from the 1994 election. As it became evident how large a majority the ANC would have, its leaders became concerned that it should not be too large. For example, were the ANC to have more than 66 percent of the vote, it would be able to make unilateral changes to the constitution. The ANC, presumably because of its objective of creating a consolidated democracy that would prevent subversive action and perhaps capital flight by the white minority, preferred a more limited majority in the Parliament. Consequently, the ANC tried to avoid getting an electoral majority in the 1994 election that would have enabled it to rewrite the constitution. The constitution was an important part of securing democracy in South Africa, and the ANC understood that if it were able to rewrite it, they might not be able to stop themselves from doing so, a step with potentially disastrous consequences.

  We focus on three other examples, all of which concern a state making concessions in the face of the threat of revolution. In all cases, the promise of these concessions worked in the sense that the revolution was aborted without the revolutionaries achieving a transfer of political power. Because of this and because of the transitory nature of de facto power, in all three cases the state reneged on its promises, which raises the natural question: Why would such promises stop a revolution? The natural reason is that in reality, and as the models we develop show, the actual extent of credibility is typically uncertain. Even though revolutionaries know there will be circumstances in which promises are reneged on, it may be better to gamble on such promises being upheld than to disregard the promises completely.

  4.2.1 The Peasants Revolt of 1381

  The Peasants’ Revolt of 1381 was one of the most important popular rebellions in British history. Our account follows Hilton (1973), Dobson (1983), and Dyer (1984). It began as a local revolt in Essex and quickly spread across much of south-east England. In the end, an army of peasants marched on London, captured the Tower of London, killed the Archbishop of Canterbury and the King’s Treasurer, and took their grievances directly to fourteen-year-old King Richard II at a famous meeting at Mile End.

  The main background to the revolt was fallout from the Black Death. This epidemic in the 1340s greatly increased wages and led to many changes in feudal institutions beneficial to the peasants. However, during this period, there was a continual attempt by lords to reassert their powers, which led to many conflicts. Peasants wanted to be free of feudal labor restrictions, regulations, and taxes. The English state was also continually fighting expensive wars and, to help finance them, Richard II introduced a poll tax in 1380. This required everyone on the tax register to pay fivepence. It was the third time in four years that such a tax had been used. If peasants were unable to pay the tax in money, they had to pay in kind.

  In May 1381, a tax collector arrived at the Essex village of Fobbing to find out why the people had not paid their poll tax; he was thrown out by the villagers. In June, soldiers arrived to establish law and order. They too were thrown out because the villagers of Fobbing had now organized the
mselves and many other local villages in Essex had joined them. The revolt quickly spread to the counties of Kent, Suffolk, Hertfordshire, and Norfolk. One man had emerged as the leader of the peasants: Wat Tyler from Kent. As the peasants from Kent and Essex marched to London, they destroyed tax records, tax registers, and government buildings.

  By June 12, the Essex men were camped at Mile End, in fields just beyond Aldgate. On the following day, the Kentish men arrived at Blackheath. The authorities were unprepared and during the next few days, different bands of rebels from Essex and Kent were joined by some of London’s poor. They set about attacking political targets in the city. They burned down the Savoy Palace, the home of John of Gaunt - Richard II’s uncle and probably the most powerful magnate in the realm. They set fire to the Treasurer’s Highbury Manor, opened prisons, and destroyed legal records.

  On June 14, King Richard and a handful of lords and knights met the Essex peasants at Mile End. The peasants pledged their allegiance to Richard, and handed him a petition that asked for the abolition of villeinage, for labor services based on free contracts, and for the right to rent land at fourpence an acre. The king agreed to grant these demands. Remarkably, later that day, some peasants entered the Tower itself, invading the royal bedchambers and the privy wardrobe. While, in the Tower, the rebels took the Archbishop of Canterbury, the Chancellor, and John of Gaunt’s physician into custody, dragging them onto Tower Hill and executing them. After these events, many of the Essex rebels began to disperse.

  The next day, King Richard met the Kentish peasants at Smithfield. They demanded an end to all lordship beyond that of the king, that the Church’s estates be confiscated and divided among the wider populace, and that there be only bishops throughout the whole kingdom. As before, the king agreed to all the demands put before him. However, the rebel leader, Wat Tyler, supposedly addressed the king with insolence and the mayor of London pulled Tyler from his horse and a squire killed him. The crowd prepared to rush the king and his men, but Richard confronted them. The death of Tyler and another promise by King Richard to give the peasants what they asked for were enough to send them home.

  London was made safe from June 16, 1381 and, over time, the authorities gained control in all the regions that had experienced insurrection. King Richard issued a proclamation denying rumors that he had approved of what the rebels had done and, soon after, revoked the pardons he had granted them. A judicial enquiry followed and the king toured the areas that had experienced revolt. In Essex and Hertfordshire counties, the rebels were dealt with severely - many of the main leaders of the revolt were already dead; those who had survived were executed. As a chronicler at the time put it:

  Afterwards the King sent out his messengers into divers parts, to capture the malefactors and put them to death. And many were taken and hanged at London, and they set up many gallows around the City of London, and in other cities and boroughs of the south country. At last, as it pleased God, the King seeing that too many of his liege subjects would be undone, and too much blood spilt, took pity in his heart, and granted them all pardon, on condition that they should never rise again, under pain of losing life or members, and that each of them should get his charter of pardon, and pay the King as fee for his seal twenty shillings, to make him rich. And so finished this wicked war. (quoted in Oman 1906, pp. 200-203, 205)

  King Richard did not keep any of his promises, claiming they were made under threat and, therefore, were not valid in law. The peasants’ revolt is a classic example of how, once the threat vanishes, the promise of concessions can be reneged on because there was no change in the structure of de jure political power.

  4.2.2 The Comunero Rebellion in New Grenada (Colombia)

  Another classic example of reneging on promises comes from the Late Colonial Spanish Empire in Latin America. When the Bourbon dynasty assumed the Spanish throne in the early eighteenth century, it attempted to implement a large number of changes in colonial institutions, mostly with an eye to increasing the amount of taxes raised. This led to widespread discontent and two major revolts: the famous Tupac Amaru Rebellion in Peru (see Stavig 1999; Robins 2002) and the Comunero Rebellion in Colombia in 1781 (known during the colonial period as New Grenada).

  We follow the definitive recent account of Safford and Palacios (2002); see also major works on the topic by Arcinegas (1938), Cardenas Acosta (1960), Phelan (1978), and Aguilera Peña (1985). Safford and Palacios note that

  innovations under the Spanish Bourbons helped sow the seeds of colonial rebellion. Administrative reform in the colonies meant ... a conscious policy of preferring Spaniards to Creoles in filling high positions, a policy that further intensified colonials’ irritation with the system. Attempts to increase tax collections provoked popular insurrection and tended to undermine the authority of Spanish officials.... The fiscal demands of war stirred substantial tax riots in New Grenada in the 1760’s and full-scale rebellion in 1781. (2002, pp. 54-5)

  In New Grenada,

  in the 1750’s ... administrators began to push for more effective revenue collection. A government monopoly of the sale of cane liquor ... became a significant revenue earner. In the 1760’s the royal government established monopoly control of the sale of tobacco.... Later officials ... raised prices for both liquor and tobacco, and doubled existing sales tax exactions, among other impositions. (Safford and Palacios 2002, pp. 63-4)

  The Comunero Rebellion began with protests in Bogotá in 1778 against the tobacco monopoly. Tobacco was widely grown by small farmers in New Grenada, and the monopoly gradually restricted the areas in which it could be grown to limit the supply and maximize returns to the royal government. The Guanentá region of northeast New Grenada (in the present-day department of Santander) was particularly hard hit. In 1780, riots broke out in Charalá, Mogotes, and Simacota. These actions induced no concessions from the government and the royal regent, Gutiérrez de Piñeres not only tightened the tobacco and cane liquor monopolies but also doubled the sales tax in the same year. These tax increases

  ... were particularly grievous to the people in the Guanentá, as raw cotton and cotton yarn were among the commodities affected, and the Guanentá was the chief center of cotton weaving in the viceroyalty. For poor people in the Guanentá, these measures eliminated one of their chief measures of support, tobacco, and endangered a second, cotton weaving. (Safford and Palacios 2002, p. 65)

  In addition, bad weather caused food shortages in the region and there was a serious outbreak of smallpox. Starting in March 1781, riots continually broke out in the region. Royal stores of tobacco and liquor were destroyed and the rebellion, although initiated by poor people, was soon organized by “men of middling fortune - butchers, weavers, cattle traders and small farmers”; moreover, “men of substance came to accept formal positions of leadership” (p. 66). In May, the rebels crushed a small force that Gutiérrez de Piñeres sent against them and support spread widely in northern and northeastern New Grenada. After this initial victory, the rebels, now calling themselves the Comuneros, marched south toward Bogotá and by the end of May, numbering perhaps fifteen thousand to twenty thousand, they were within reach of the capital.

  By this time, Gutiérrez de Piñeres had fled the city and effective power was in the hands of Archbishop Caballero y Góngora. He immediately agreed to a list of thirty-five demands by the Comuneros, including the abolition of the new sales tax. The tobacco monopoly was to be ended. In short, as Safford and Palacios stated (2002, p. 67), “the implementation of all of these provisions would have meant the abandonment of virtually all of the new Bourbon revenue measures of the previous two decades.” In addition, the Comuneros demanded the expulsion of Gutiérrez de Piñeres and the promotion of Creoles in the government.

  Once the Archbishop had agreed to all of the demands, he was able to persuade the rebels to go home. However,

  After the fervor of rebellion cooled somewhat in the Guanentá, and reinforcements of royal troops arrived from Cartagena ... the royal g
overnment carried out exemplary punishments. José Antonio Galán, who had persisted in rebellion after the capitulation of June 1781, and three other Comuneros were hanged in January 1782; their heads, hands and feet were placed on poles in public squares in the capital and towns that had figured prominently in the rebellion. Others ... were sentenced to 200 lashes, public shame, and imprisonment in Africa. Landless peasants in the Guanentá were sent as colonists to the Isthmus on Panama.... Once the most severe punishments had been administered, royal officials ... revoked the agreement with the Comuneros.

  Thus, although the promise of concessions was sufficient to appease the Comuneros in June 1781, once the threat had subsided, the royal government reneged on its promises.

  4.2.3 The 1905 Russian Revolution

  Our final example is the 1905 Russian Revolution (Ascher 1988,1992; Verner 1990; Rawson 1995). The revolution was precipitated by the disastrous military defeat of Russia at the hands of the Japanese, particularly the battle of Tsushima in May 1905, but it also reflected the many social tensions inherent in Russian society. Although the serfs had been freed in 1865, there were still many restrictions on their abilities to buy land or move, and conditions in the factories of the newly industrializing cities were very harsh. Attempts by workers to form trade unions were resisted by the factory owners. In 1903, a priest named Father Georgi Gapon succeeded in forming the Assembly of Russian Workers. Within a year, it had more than nine thousand members.