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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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The best books to read are often those which most challenge our worldview. Personally, I get little out of reading books I already agree with. No new insight is gained when I’m the choir being preached to. So with this in mind I picked up Wolfgang Sachs’ Planet Dialectics in the ECHO Asia library. This is a challenging read because it questions the very idea of “development,” a word which defines both my studies and my current career path.

So what’s wrong with development? Isn’t that what we want? Isn’t that the goal of poor societies? What about the Millennium Development Goals, The US Agency for International Development, the UK Department for International Development, The United Nations Development Programme and the rest? How could hundreds of organizations deploying thousands of buzzwords and acronyms be wrong?

The answer, as in many debates, may well boil down to semantics. In other words, it depends on what we mean by development. To get a sense of this, a few graphs might be in order. Here’s a picture of the world’s GDP over time:

(image from: sustainablescale.org)

Notice that until the 20th century the world GDP pretty much tracked with the world population. Then a take-off occurred as the industrial revolution spread, followed by an even steeper take-off aroun 1950 when the post-WWII world order enabled a greater degree of globalization, free trade, automation and the rest. Remember GDP is a measure of the total amount of goods and services produced for sale in the economy. For millenia this was tied entirely to the amount of labor available to produce the goods (world population), but the industrial revolution changed all that, making a remarkable increase in goods and services possible–with an attendant spike in the number of resources used to produce those goods and services.

Development theory dates to the 1950s, right when that spike in production happened, when economists began wondering how they could get the formerly colonized nations onto the same track of expansion that the industrialized nations were already on. See the assumption: they need to be like us. Thus the following graph from one of the founding fathers of Development Economics, Walt Whitman Rostow:

(image from: wikipedia entry on Rostow’s stages of growth)

This is intended to model the process by which all economies will go from a traditional society, where production is tied to labor and the economy is on a more or less subsistence level, to the ultimate goal: High Mass Consumption. Notice that the graph is shaped the same as the world GDP graph above. The Big Idea of early development economics is that industrial societies have achieved a remarkable increase in production, which has meant a rise in standard of living. So we should be helping other nations along this path. I made a prezi for a seminar a while ago that goes through the history of Development Economic thought if you want more detail on it. Suffice it to say however, that Rostow’s graph has dominated the conversation for the last 50 years. Though the mainstream has shifted away from it, economists still have this idea in their heads when they use the word “development.”

And here Wolfgang Sachs objects. You can get a sense of his argument if you look back at the world GDP graph. You’ll notice it is still shooting straight up. Sachs main question is, how much is enough? If the whole world were to consume at US levels we would need 3 more earths. In other words, though Mr. Rostow’s goal was for every country to follow the US and Europe into High Mass Consumption, it is simply impossible for the whole world to follow the same consumption patterns. We don’t have enough of the exhaustible resources to make this possible.

So Sachs would like us to stop talking about development and start talking about sufficiency. In one passage he asks a series of related questions: “How would an advanced transportation system look like that was not shaped by the imperative of acceleration?” “What would a politics look like that centred on the regeneration of places?” “What would things look like if they were designed with a view to quality, durability and uniqueness?” (p. 89) He’s getting at the idea of an economy based around sufficient production, rather than continual growth. He’s suggesting that maybe the past 50 years should be considered an anomaly, that eventually we should step off the train and be happy with enough rather than always a little more.

Of course, an economist would respond that economic growth is not necessarily tied to greater resource consumption. Sachs tackles this in the latter half of Planet Dialectics. The issue is whether or not we can have resource-efficient growth. Sachs notes that globalization has erased some of the inefficiencies which resulted in an inefficient use of resources. So in that respect the development process has increased our resource efficiency. But that increase in efficiency has been more than compensated for by an accompanying increase in demand. Data has shown that any increase in energy efficiency by home appliances only means that people will use that savings to consume energy some other way. This is known as the Jevons Paradox, and is fairly well documented. In other words, becoming more efficient at producing things only encourages us to produce more things, which means we use more resources (oil, gas, metals, whatever).

So Sachs conclusion is that we need a broad cultural movement toward accepting a flat rate of growth. He wants a vision, not of development and progress, but of plenitude and sufficiency. He says, “the productivity of a sustainable society will be measured not by the eco-efficiency of an ever expanding number of technologies, but by the quality of the civilization it creates out of limited means” (p. 182).

But, again, an economist would argue that this is not a problem with growth per se. It’s a problem with pricing. Sachs himself says “under the given price systemglobalization will deepen the crisis of nature” (p. 142, emphasis added). The laws of supply and demand would indicate that if we are consuming a given resource at beyond a sustainable rate it is because that resource is priced too low for some reason, most likely because of some sort of subsidy. And indeed many of the instances of water over-use (for example) can be traced to subsidies, whether implicit or explicit, which allow people to use it wastefully.

Unfortunately many goods incur public costs as well as private ones. The elephant in the room here is carbon emissions. With the exception of a few European countries (most recently Ireland) and a couple of provinces in Canada, the adverse effects of carbon emissions are not factored into the price of energy consumption in most economies. This also applies to goods which have negative health effects. One rationale for the “sin taxes” on tobacco and alcohol is that the increased price better reflects the full social cost of their consumption.

The above discussion should reflect the degree to which providing accurate price signals for certain goods can in fact be a politically contentious undertaking. But whether you agree with Wolfgang Sachs that we need to stop pursuing economic growth, or you are a proponent of “greener growth,” it’s difficult to deny that we have to find a solution for the rampant resource consumption that accompanies what–for lack of a better word–we call “development.”

Final note: Sachs is a fairly prominent gadfly in the world of development thought. For a more mainstream view, Diane Coyle recently published The Economics of Enough: How to Run the Economy as if the Future MattersI listened to an interview with her on the Development Drums podcast, which I recommend. Also, just to drive home the point that development theory really has moved past GDP as the lone indicator of development progress, check out the UNDP Human Development Index data. This tool allows you to compare different countries’ Human Development Index (a measure of health, education and quality of life data) vs. their Gross National Income. You’ll be surprised at the results. Ghana, for example, has a higher HDI than Equatorial Guinea, though a much lower GNI.

So no hard and fast conclusions here. Just another reminder that there really is more to life (and development) than money (or goods and services). If you’re reading this and you have objections or questions I’d love to hear them.