Nancy Birdsall reviews Why Nations Fail: The Origins of Power, Prosperity, and Poverty, by Daron Acemoglu and James A. Robinson.
The following review originally appeared in Finance and Development.
Why Nations Fail
The Origins of Power, Prosperity, and Poverty
Crown Publishing Group, New York, 2012, 544 pp., $30 (cloth).
This book provides a wondrous dose of healthy skepticism for anyone who thinks she knows how to get the machinery of growth and prosperity going in Malawi, Nepal, Egypt—or for that matter how to restart that machinery in Greece and Italy. Whether in your gut you follow Friedrich Hayek (a free society will prosper) or Karl Marx (an unequal system is bound to implode), or like most economists and students of development you believe in the possibility of “engineering prosperity” with good policy advice and support, this book will make you think again.
It’s also a great read: ambitious and compelling in its combination of broad scope and fascinating detail. The authors argue that in the absence of inclusive political and economic institutions, nations inevitably and eventually (more on that below) fail. Without inclusive institutions to challenge and constrain the political elite (the absolutists, the monarchy, the shogun, the tribal chiefs) there is no creative destruction. The elite use political power to protect the status quo and preserve “extractive” economic rents (excessive returns from market power). The people have no reason to invest and no incentive to innovate. Economies can grow for a long time on the basis of extraction (the Roman Empire, China in the past three decades). But without the engagement and empowerment and enterprise of the majority of people, extractive regimes eventually run out of steam and succumb—to infighting and implosion or to outright defeat by outside conquerors.
The argument is illustrated by examples over many millennia (the Natufians on the Euphrates in the Neolithic Age, Mayan cities in 500 BC, England in 411), and in many places (the Transkei, the Kingdom of Kongo, New South Wales, Aksuma—now part of Ethiopia, Somalia, Japan, China, Russia). New phrases capturing key turning points enliven the story: the Venetian commend contracts, parliamentary petitioning, the Black Death, the iron law of oligarchy, the “irresistible charm of authoritarian growth.”
Where do inclusive institutions come from? Why did they emerge in England (a backwater in 750 AD when the Mayan city of Copan had 28,000 people) with the Industrial Revolution, and not then or even yet in Ghana, Peru, or Russia? Why did the relatively inclusive Roman Republic yield to imperial absolutism? Why did Venice manage inclusion and then lose it? The authors don’t pretend the process is simple or predictable. Nations succeed in part because they are lucky; sufficient centralization keeps chaos and instability at bay, and pluralism provides incentives for work and invention. Small differences in initial conditions combined with accidents of history (“critical junctures”) lead societies in entirely different directions. The 14th century Black Death undid serfdom in western Europe but not in Russia; the rise of Atlantic trade empowered Parliament in England, but strengthened the absolutist and extractive monarchy in Spain. The Dutch East Indies monopoly destroyed indigenous inclusive institutions in Aceh, Indonesia, to enrich itself. The royal Virginia Company, its counterpart in 17th century Jamestown, Virginia, had no such luck; with land plentiful and labor scarce its workers had many options and developed their own inclusive economy and polity.
But the book is far from complete, leaving the authors room, perhaps, for a follow-on. They never define failure. What they mean is not only complete collapse (Sierra Leone, the Roman Empire, the Venetian city-state) but the failure of most nations to develop the inclusive institutions that have brought high and sustained prosperity to people in North America, western Europe, Australia, Japan—and a few other places, such as South Korea and Botswana. The story is about levels, not about managing transitions from exclusive to inclusive. And what’s the relevant time frame? The “extractive” Roman Empire spanned at least 300 years of reasonably good living for a broad group of its own citizens, and the Mayan city-states even longer. Extractive politics in China has brought longer and better lives to millions of people in the past three decades, and might deliver further gains without inclusion for decades to come.
The authors argue that ultimately politics matters, not economics (or culture or geography). But they also sometimes invoke economic realities to explain political outcomes. It was the scarcity in Jamestown and the economic aftermath of the Black Death in Europe that triggered inclusive politics—not the other way round. In Peru and the Caribbean it was gold and cotton, economic endowments, that made elite extraction too easy. In postwar Korea, good economics—an inclusive economic system (the Americans imposed land reform)—eventually ushered in inclusive politics. Are not healthy global market pressures (and changing global norms about democracy, and Twitter and Facebook, and maybe even sensible advice from the IMF and the World Bank) helping that process along now in Ghana, Indonesia, and Mexico?
The authors decry the development industry’s “ignorance hypothesis.” They are right that the problem is not that leaders in poor countries don’t know what to do—rather it is local incentives and constraints that make them unable or unwilling to follow outsiders’ good advice. On the other hand, perhaps IMF “hectoring” (their term) about the ingredients of good macroeconomic policy contributed to recent steady growth in much of Africa. Perhaps access to life-saving technologies and mobile phones, the women’s movement, the fight against sex trafficking, the growth of the microfinance industry, even much maligned privatization and dismantling of agricultural marketing boards—perhaps these, besides improving lives in extractive countries right now, could also, as in the Arab Spring, trigger a new generation of inclusive politics and sustained growth and prosperity in the developing world.
Or is this reviewer suppressing the healthy skepticism this book should provoke—about the influence of outsiders in an increasingly global world—and succumbing to naïve or, worse, self-interested pragmatism? If you work in the development industry—as activist, student, bureaucrat, academic, official—do read and then ask yourself that question.
Nancy Birdsall,
Founding president of the Center for Global Development