Why are some countries rich and others poor? Is it weather? Culture? Geography? The authors of a new book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, argue that success almost exclusively depends on a country’s economic and political institutions.
Why do some countries grow and others stagnate? Why did
growth emerge in a few countries in the second half of the 18th century (but
not in others), after a millennium of hardly any increase in world per-capita
income, and why in Britain?
These are big questions that Daron Acemoglu and James A.
Robinson tackle in an ambitious book that aims to change the way that
economists and others think about growth. It is a book that needs to be read,
its ideas understood.
Rich countries are rich and poor countries are poor
because of their economic and political institutions, according to the authors.
Rich countries are organized around what the authors call
“inclusive” political and economic institutions. Inclusive institutions give
the average person a voice in the political realm. In the economic realm, they
establish a level playing field, protect property rights, offer the average
person opportunities to rise up, and reward innovation.
Poor countries are poor because they are organized around
“extractive” institutions. An extractive economic institution is one designed
to extract resources from many by the few. These institutions are the norm, not
the exception.
“Poor countries are poor not because of their geographies
or cultures or because their leaders do not know which policies will enrich
their citizens.” Poor countries are poor because of their institutions.
Most economists would agree that institutions are
important for growth. What sets the authors’ theory apart from others is their
claim that institutions matter much more than anything else. Geography (i.e.,
natural resources, location, and climate), culture, and visionary leaders are
secondary. Growth is mostly about a country’s institutions.
North and South Korea’s institutions are examples of
each. These countries share a similar geography, history, and culture. Both
were poor 60 years ago. But South Korea’s institutions (inclusive) evolved much
differently from those of the North (extractive), which is why per-capita
income is more than 10 times higher in the South than in the North, according
to the authors.
Growth in authoritarian regimes is possible. Sustained
growth is not. China, for example, has grown under extractive political institutions.
But its growth is “catch-up” from a low base, and its economy will eventually
run out of steam (“unless it undergoes a fundamental political transformation
towards inclusive political institutions”) just as the Soviet Union’s economy
eventually ran out of steam, according to the authors. A better model for
growth is Botswana, a landlocked country in southern Africa, and one of the
world’s fastest growing since gaining independence in 1966. This country, which
has an unblemished record of democracy since independence, leveraged diamond
wealth to invest in infrastructure and schools, during periods when other
African countries (with extractive institutions) were using diamonds to build
armies to protect the wealth of an elite few.
Also setting this study apart from others is its
approach. Economists over the past half century have analyzed growth using
tightly constructed mathematical models. This book contains no equations, no
proofs, not a single regression. The theory is developed using vivid historical
examples. Maps instead of eye-glazing tables and charts are used to illustrate
key points. This approach allows them to both reach a wide audience, as well as
dig deeper into the fundamental causes of growth.
At one level, economists understand growth well. Robert
Solow’s pioneering research on growth a half century ago and subsequent work by
other economists established that innovations, as well as investments in human
and physical capital, explained why some countries succeeded and others did
not. But why have some countries followed the winning strategy of innovating
and investing in physical and human capital while others have not? Answering
this fundamental question requires tossing out the math, and adding history and
politics to the brew. Acemoglu and Robinson are not the only economists to
follow this approach. But they have dug deeper than the handful of others who
have followed this path—and have hit gold.
Other key points made in the book:
A pivotal event in human history was the Glorious Revolution
(1688), when parliament overthrew King James II of England, replacing him with
a constitutional monarchy, paving the way for the Industrial Revolution.
“The Industrial Revolution started and made its biggest
strides in England because of her uniquely inclusive economic institutions.
These in turn were built on foundations laid by the inclusive political
institutions brought about by the Glorious Revolution. It was the Glorious
Revolution that strengthened and rationalized property rights, improved financial
markets, undermined state-sanctioned monopolies in foreign trade, and removed
barriers to the expansion of industry.”
Strong central governments are essential for growth,
since they are needed to establish the rule of law and enforce property rights
and contracts.
The divide between rich and poor countries took place
over 150 years ago. Since then, a few countries, such as South Korea and
Singapore, have moved up and others, such as Argentina, have moved down. But
mostly, those at the top and those at the bottom 150 years ago remain there.
The authors are not among those who believe that economic
prosperity or a more-educated workforce eventually lead to more democracy and
inclusive institutions.
They see foreign aid as a failure, but are not against
it, since the small portion that filters through to the intended beneficiaries
is better than nothing. They are also deeply skeptical about the current
practice by Western economists of attempting to engineer prosperity by advising
foreign governments.
A body of research’s importance can be gauged by how
often it is cited by subsequent research. This book will be heavily cited and
will generate a lot of high-powered research. That alone is one reason to pick
it up. But a better one is that it is just a good read.