Why Nations Fail

Why Nations Fail by Daron Acemoglu and James Robinson is the book of the hour in development theory. I decided I had to read it  after seeing Bill Gates’ harsh review and the authors’ adept response. I figured anyone who’s got an on-line flame war going on with the world’s richest man must have written something pretty interesting. And I was right.

Why Nations Fail purports to explain the inequalities between nations. Fans of Jared Diamond will recognize this as the question addressed in his book Guns, Germs and Steel, probably the most widely read book to attempt to answer this question. Diamond’s answer is that inequalities in wealth between nations can be explained by differences that boil down to geographical luck: natural resources, prevalence of certain infections diseases and the availability of productive crop species. Acemoglu and Robinson beg to differ.

The authors of Why Nations Fail argue that geographical differences are ultimately swamped in the post-industrial era by differences in institutions. Their basic theory is that more inclusive political institutions and open, competitive economic institutions are the prerequisites for growth, and these factors dominate the fates of nations far more fully than other factors. On the other hand institutions which Acemoglu and Robinson call “extractive”–because they serve the interests of a narrow few–contribute to national poverty.

Acemoglu and Robinson illustrate their point with a host of historical narratives. Perhaps most compelling are examples like North and South Korea, or Nogales, Mexico and Nogales, United States, where recent borders have created differing institutions in places that have otherwise identical cultures and natural resource endowments. The way Acemoglu and Robinson tell the story, every such case results in greater wealth where political institutions are more inclusive to participation and responsive to citizens.

In its broad application, I think in broad strokes the premise of the book is correct. Political institutions are obviously important in creating an environment conducive to economic growth. But it has been attacked in some of its particulars. Jared Diamond predictably fired back in defense of geography as an important factor. And other thinkers contend that it is possible that wealth comes first, then political openness. The best critique I have read so far is by the historian Peer Vries, who argues that inequality can be better explained by a complex of interrelated proximate causes rather than one ultimate cause like Institutions with a capital I.

My problem with the book is that it fails to answer some of the more interesting questions its premise creates. Most frustratingly, when talking about inclusive institutions they fail to ask, inclusive to whom? They place the level of analysis squarely on the nation-state, failing to look at either international institutions or local institutions.

To my mind every institution is inclusive to someone, and exclusive to others. So some nations have institutions that are inclusive of their citizens, but all nations are exclusive to citizens of other countries, which is a problem if their policies effect those other citizens. One might even say that many times in history one nation’s inclusive institutions have acted as extractive institutions to those in other nations. The Dutch East India Company, the slave trade and the United Fruit Company are just a few potential examples.

In other words, inclusivity and exclusivity are always side by side. The most interesting application of Acemoglu and Robinson’s analysis might be to ask how inclusive the systems within international corporations might be. How about the World Trade Organization? Given the significant weight given to rich countries’ preferences in the WTO, one might categorize it as more extractive than inclusive by Acemoglu and Robinson’s standards. But they don’t ask that question.

The other big, much discussed hole in Why Nations Fail is the treatment of China. The authors offer two options for China: democratize or fail. Other analysts wonder if the question is so stark. Maybe China has found a kind of sustainable autocracy. Or maybe their progress toward democracy will take a lot longer than optimists might hope. I for one hope Acemoglu and Robinson are right, or at least, I hope that China will indeed move toward a more inclusive government. But at this point, it’s hard to say.

(side-note: I really want to read this book about Deng Xiaoping and reform in China, but who knows when I’ll find to time to tackle 1000 pages of Chinese history)

To wrap up, I would recommend reading Why Nations Fail, if only as a helpful counter-weight to the geographical determinism that Jared Diamond has foisted on the popular consciousness. But be aware there’s more going on in the world of development theories and the economics of inequality.

Also, check out this interview with Acemoglu and Robinson on Development Drums. Worth a listen.

 

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