Why Nations Fail – The Origins of Power, Prosperity, and Poverty (2012)
Authors: Daron Acemoglu and James A. RobinsonNew York: Currency Books
In Why Nations Fail, Daron Acemoglu and James A. Robinson propose to explain why same nations fail, and others succeed economically. In a book that includes various comparative analyses between countries, the authors aim to create a theory for the differences, based on the origins of power, prosperity and poverty.
The book is divided in 15 chapters. My review will go over them in order.
In the first one, “So Close and Yet so Different”, the authors bring a very symbolic example when they compare two cities with the very same name in the two sides of the U.S.-Mexico border: North American and Mexican Nogales. The differences in the development, mainly visible in the infrastructure and standards of living, are very well-pronounced between them. And bring their main core arguments that the differences can be explained by distinct political and economic institutions these countries display. At the U.S. side of the border, there is freer choice of occupations, more acquisition of schooling and skills and superior technology. Politics-wise, more North Americans take part in the democratic processes than Mexicans do. All these elements form inclusive and political institutions, the root for prosperity and development. And why are some institutions so much more conducive to economic success? They believe this is explained by the way societies formed during the early colonial period. The chapter shows other interesting comparisons, not only of rich-poor countries but also of apparently peer countries or regions, which differed throughout historical evolutions. For example, Spain was richer than England until the latter won key maritime battles against the former. And cities such as Buenos Aires and Asuncion are different because of their different settlements: one for living and the other one for pure exploration.
In Chapter 2 (“Theories that Don’t Work”), the authors reinforce the historical element as a drive for development. And propose to rule out some theories that are used to explain developmental differences such as the geography hypothesis or the religious factor. The authors defend that productivity levels don’t change much because of the distance to Ecuador, but rather and more importantly due to “get-rich quick” discoveries such as gold or oil. On religion, the authors defend that the primary reason for the Islamic countries’ underdevelopment is much more linked to the type of colonial rule they were subjected to, than anything else. Nevertheless, culture plays a role in explaining developmental differences, as divergent paths of accumulated cultural aspects can explain differences.
Chapter 3 (“The Making of Prosperity and Poverty”) begins with a similar but perhaps more disparate border comparison than the Nogales example: the abysmal difference between the economies of the two Koreas, the Northern one representing one tenth of the size of that of their Southern neighbors. And in this chapter, the root characterization of inclusive economic institutions take place, as they are defined as “those that allow and encourage participation by the great mass of people in economic activities that make best use of their talents and skills and that enable individuals to make the choices they wish; to be inclusive, economic institutions must feature secure private property, an unbiased system of law, and a provision of public services that provides a level playing field in which people can exchange and contract” (ACEMOGLU and ROBINSON 2012, pp. 74-75). Additionally, the chapter brings another key theoretical concept which catalyzes the process of economic growth and technological change, which is the one of creative destruction, by economist Joseph Schumpeter.
Chapter 4, “Small Differences and Critical Junctures: The Weight of History”, as its name suggests goes back to history reinforcing its shaping power on development. The different routes that Western Europe and Eastern Europe underwent by the consequences of the plague and death started at the Middle Ages are highlighted. In the West, the massive scarcity of labor created shook the foundations of the feudal order, encouraging peasants to demand that things changed. That led to more inclusive markets being created. On the other hand, Eastern Europe saw the continuity of extractive institutions as the owners of land had bigger tracts of soil and took advantage of their position to exert their power over the poorer individuals. The chapter also touches on other comparisons such as the unequal passing of power from the kings to the merchant class that took different paths in Spain and in the United Kingdom: while monarch absolutism grew in the former, it got challenged and weakened by the Glorious Revolution of 1688 in the latter. Similarly, in Asia, China walked an absolutist path while Japan broke its former feudal order at the Meiji Restoration in the nineteenth century. The divergent paths just mentioned, were decisive to the enhancement (or weakening) of the inclusive (or extractive) political institutions of the countries.
In Chapter 5, “I’ve Seen the Future, and it Works: Growth Under Extractive Institutions”, the authors bring this sarcastic title to the ill-founded belief that leaders from countries with extractive institutions have that this model can succeed over a long period of time. The chapter goes back to pre-historic times (the Natufians-brought human enhancement from nomadism to sedentarism) but also stays in more recent times. Soviet Russia is a subject that is explored in more detail. Per Acemoglu and Robinson, this was planned to work as “a scientific rearrangement of economic forces which would result in economic democracy first and political democracy last” (ACEMOGLU and ROBINSON 2012, pp. 122-23). It resulted that neither of them was fully achieved, especially the second one. In similar fashion, the authors bring current China to the table asking whether their model can be sustainable in the long run.
Chapter 6 (“Drifting Apart”) brings more historical observations as key elements to explain developmental differences constructed over a sequence of decisions. The Roman Empire is firstly presented as an example of a dynasty that lost its force due to the change from republic to empire status. At the republican phase, peoples’ voices and rights were more respected, whereas the international military conquests led to an empire that became more egocentric within its layers of power. Per the authors, “Rome’s increasingly extractive political and economic institutions generated its demise because they caused infighting and civil war” (ACEMOGLU and ROBINSON 2012, p. 168). Interestingly, also the authors claim that England, perhaps the country most used by them throughout the book to define a positive example of increasingly inclusive institutions overtime, was where Roman hold was the weakest. And therefore, where “feudal order made way for commercially minded farmers and independent urban centers, where merchants and other industrialists could flourish” (ACEMOGLU and ROBINSON 2012, pp. 180-81). Connected to this last thought, the authors go to the United States and differentiate the different developmental evolutions (until the middle of the twentieth century) of its North-South by the fact that the former had no slavery while the latter had.
Chapter 7, “The Turning Point”, focuses on the evolution of England, from its pioneering Magna Carta (1215) to the absolutist political status that was weakened by the Glorious Revolution of 1688. The authors claim that prior to this last event, extractive institutions were the norm; and the Industrial Revolution was a dynamic process that was unleashed by the institutional changes that flowed from it. The Industrial Revolution per se was not the source of England’s development, but its subsequent events such as multiple gradual steps toward democracy and liberalism (such as the state-led infrastructure boom of the end of the eighteenth century, the repeal of the Corn Laws in 1846, wider suffrage achieved at the end of the century, among other events).
Chapters 8 and 9, “Not on Our Turf: Barriers to Development” and “Reversing Development”, respectively, show the other side of the coin: states that sabotaged common prosperity due to absolutism, fear of creative destruction, segregation policies and lack of political pluralism. As examples of states that followed this recipe, partially or fully, the authors bring the Ottoman Empire, Russia, the Austro-Hungarian Empire, segregationist states in the south of Africa and an African state that is one of the few cases that has not suffered any colonialism (Ethiopia). For most of these cases, bi-products such as dual economies (a concept proposed by Sir Arthur Lewis in 1955 which asserts that many less-developed or undeveloped countries present a clear distinction between modern urban life and traditional “backward” institutions in the rural side) and technology adoption tardiness arose.
Chapter 10, “The Diffusion of Prosperity” brings back England related history as the main protagonist. At some point in the book, the authors question how come England colonies turned into very different countries in terms of development, naming the outcomes of Canada and Australia versus the ones of Nigeria and Sierra Leone. But the question can be expanded to a Europe-Colonies dimension. For Australia, the authors point out that its extremely low demographic density in the early colonial years was fundamental to develop more inclusive institutions versus extractive ones. As the authors assert, there was no Latin American option in Australia, meaning that the convicts were the only labor force available to develop the territory, so, they were enabled to be entrepreneurs once they ended their sentences.
Chapters 11 and 12, respectively “The Virtuous Cycle” and “The Vicious Cycle” confront “winning” and “losing” economic development paths. For the virtuous case, the authors rely on the history of the United Kingdom and the United States. In these places, economic liberalism and political pluralism made gradual steps that were able to bring their superior economic output of today. Making direct comparisons, the authors cite the anti-trust legislation that was passed back in 1890 in the United States, confronting it to the current absence of a political body to restrict the ultra-monopolist status of Mexican businessman Carlos Slim. In terms of politics, the authors compare the failed and successful interference attempts of the executive power against the other powers (legislative and judiciary). Here, they cite that U.S. President Roosevelt tried to interfere but was held back in the 1930s, whereas many decades later South American presidents such as Perón (Argentina), Fujimori (Peru) and Chávez (Venezuela) were able to do it, in detriment of democracy. For the vicious cases, the authors regret some instances where failed models are perpetuated in various countries of Africa (such as Sierra Leone, Zimbabwe and Ghana) or in Guatemala, where the current elites in power descend to the old same main families that were privileged back in 1531. Acemoglu and Robinson claim that “as virtuous circles make inclusive institutions persist, vicious cycles create powerful forces toward the persistence of extractive institutions” (ACEMOGLU and ROBINSON 2012, p. 168). Despite the unfavorable examples, the authors show a certain optimism claiming that history is not destiny and vicious cycles are not unbreakable, although resilient.
The book advances to its final three chapters, “Why Nations Fail Today”, “Breaking the Mold” and “Understanding Prosperity and Poverty”, where they recap the main concepts previously presented and propose ways, depicted by practical examples, so that development can be achieved by poorer nations. So, why nations fail? The answer, per the authors, is connected to their extractive political and economic institutions, the fundamental root of the problems. The solution is fairly simple (although extremely complex), nations need to transform their extractive political and economic institutions toward inclusive ones. Or, in other words, they need to break the mold. How can the mold be broken? The authors don’t bring a recipe but bring two cases of countries that were able to do so: Botswana and China. Botswana is an African country that presents superior indicators related to economic development, especially when compared to other African counterparts. Botswana was able to break the vicious cycle, unlike most of the other ones who couldn’t, because, since independence, it has been democratic, holding regular and competitive elections, and has never experienced civil war or military intervention. In Botswana, government enforces property rights, ensuring macroeconomic stability, and the development of an inclusive market economy. Botswana was fortunate to find diamonds in its subsoil. However, there are many examples of other countries that were able to find similar riches but were unable to break the mold. Botswana succeeded as it was wise in shaping its laws right after the mineral discovery, establishing that all subsoil mineral rights were vested in the nation, not in the tribes (which took place in Sierra Leone and led to conflicts between them). The centralization of the resources at the government level, in addition to an efficient and transparent management of them, enabled the country to invest in infrastructure and public services. In China, after a disastrous economic performance under Mao Zedong, where mandatory state purchasing of goods prevailed, after his death, the central government decided to economically incentivize freer markets, and this was crucial for the onset of the Chinese economic miracle that ensued. The authors highlight the critical junctures of both countries – the post-independence measures of Botswana and the death on Mao in China – as key elements for the breaking of the molds. But it’s paramount that countries take advantage of these junctures to break the molds, oftentimes countries lose the opportunity. So, every little step in getting economic and political institutions to become more inclusive count. In the final chapter of the book, the authors bring additional strategies that need to be considered as mold-breakers. Firstly, they claim that prosperity can’t be engineered by multilateral institutions such as the IMF, because they just provide a general solution to economic troubles, that normally gets lost at the micro-level. The authors claim that the problems usually lie at the level of micro-market failures. Oftentimes the funds from multilateral entities or international donors end up in the hands of regimes that preside over extractive institutions. Thus, a good portion of them get wasted and don’t reach the root of the problem. Secondly and closely related to the goal of more political inclusion, the authors reinforce the empowerment factor, meaning bringing up as many citizens as possible to participate in the political processes of the country, as key to get it. Thirdly, media needs to be independent, and can’t be bought, under any circumstance, by the ruling government.