Why Nations Fail

Why do some countries do better than others? Why are some societies rich and others poor? Jalal Parsa remains unconvinced by Acemoglu and Robinson’s attempt to find an explanation

Acemoglu and Robinson’s Why Nations Fail is a history book written by economists which attempts to tackle the prickly questions of why some countries do better than others? Why are some societies prosperous and others poor? Is it only by chance or is there a reason? Many economists as well as historians have tried to answer this long standing question. Some suggest that geography is responsible for this unequal development. For example Europe prospered because of its mild climate, constant rainfall, and the fact that unlike tropical lands its soil is rich and nutritious. It also prospered through maritime trade thank to its access to the Mediterranean and the Atlantic. However in the author’s view the geographical explanation does not adequately explain the gap between Mexico and Texas or the gap between North and South Korea. Economists also reject the theory of “the culture hypothesis”. As the main advocate of the cultural hypothesis they follow the famous German sociologist Max Weber who claimed that the Protestant Reformation and Protestant ethics played a key role in the prosperity of Western Europe, in contrast to the Catholic south.
Acemoglu and Robinson reject all those explanations. For them what matters most in determining nations’ failure and success are “institutions”. One interesting example is the story of European colonies in South and North America. They believe unlike today, the North- Canada and United States – was not the most prosperous part of the Americas when the first colonialists arrived. To the contrary the South provided much more wealth for Europeans with its gold and silver. English colonialists did not choose the North because it was better, but because it was the only place available. The desirable part of the Americas where the gold and silver mines were located and where a large indigenous population existed to be exploited had already been occupied by the Spaniards. They had their own efficient and tested method of occupying and subduing. That was what they did in Mexico to the Aztec emperor Moctezuma who was naive enough to welcome the Spaniards peacefully. They captured him, looted his wealth and conquered the Aztec empire in less than two years. This did not happen in the North.
The English colonialists arriving in the east coast of North America were also looking for indigenous people to exploit as well as gold and silver treasures. Like the Spanish the notion that they had to work to grow their own food did not cross their minds. To survive they had to trade with the local king Wahunsunacock who, unlike the Aztec emperor, was greatly suspicious of the settlers’ intentions. He did not go to the settlers in Jamestown, rather he asked them to go to him.
English settlers did not find silver or gold in the North, or a population to exploit. They had to work for themselves. In brief this is what led the North American settlers to abandon the idea of exploitation and begin an inclusive economy.
The authors argue the precondition for any inclusive economic institution is an inclusive political system by which they mean a centralised sovereignty that respects rights of individuals, their right to property, free trade, participation, innovation and the rule of law as well as providing basic public services like security, justice, enforcement of contracts, trade routes and education. In contrast extractive institutions cannot build a prosperous society because they cannot generate sustainable technological changes. This is due to two reasons: first the lack economic incentives and secondly the resistance of the elite.
They accept that extractive economies and political institutions may also lead to growth, but not a sustainable growth. In their view extractive institutions at least provide a level of political centralisation, essential for any economic growth. Extractive systems are not sustainable for two reasons: first they tend to oppress innovation and secondly since the political leaders enjoy most extractive economic benefits, the rest of society is convinced that the only feasible way to get rich is to share political power and this inevitably ends up sowing more rivalry, division, political chaos, all of which hinder growth.

…the political leaders enjoy most extractive economic benefits; the rest of society is convinced that the only feasible way to get rich is to share political power and this inevitably ends up sowing more rivalry, division, political chaos, all of which hinder growth.

Another key element in their analysis is the fact that extractive institutions are very persistent. No extractive institution can become inclusive and leave the elite in a competitive environment – at least not voluntarily. So how can an extractive instruction be replaced by an inclusive one? The authors’ answer is revolution or in critical junctures. The French Revolution of 1789 abolished the feudal system and all the obligations it entailed; it also removed the tax exemption of the nobility and the clergy. The authors however make a distinction between two types of revolutions: narrow-based revolutions and wide-based revolutions. The French Revolution and the Glorious Revolution of 1688 in England are examples of the latter and the Bolshevik Revolution in Russia is an example of the former. Narrow-based revolutions only replace the elite but the institutions remain extractive. Going back to the authors’ original question, nations fail economically because they are dominated by extractive institutions.
A contemporary observer may notice that ‘supposedly inclusive institutions’ in the West also have a great tendency to be extractive. The political system in the Western world is dominated by big banks and financial institutions like Goldman Sachs and other corporations who believe they are too big to fail. One could argue that tight patents and copyright regulations in the Western world hold back innovation and new ideas, unlike societies with more relaxed regulations.
There is one more important question: inclusive institutions are good, but for whom? According to Acemoglu and Robinson inclusive institutions are good for the majority, whereas in extractive economies only a few people benefit.
Now one may ask how the inclusive institutions of the United States, for example, can benefit the majority of the world’s population? The logic only works if you restrict your unit of study to the arbitrary notion of nation-state whereas if you take the entire world as your unit of study, it suddenly becomes evident that the global economic system is nothing but an extractive one.
What we know – and the authors give many examples – is that extractive economies can do very well. Many of them such as USSR and Germany before the end of WWII demonstrated that they are capable of substantial growth. Nevertheless for Acemoglu and Robinson, “sustainable” economic institutions by definition are those which are still functioning. But this is a very short and selective historical timeframe. We do not know for sure whether the United States or China will sustain their growth and prosper in the long run. The authors believe that China will eventually stop growing because its institutions are extractive. But they do not show why extractive institutions cannot evolve into inclusive ones over time and why the institutions in the West are immune to changing into extractive ones. This is a bit ironic since at this moment the West is in a crisis caused by monopolised and extractive financial institutions, and China is not.
The book also points out the gap between North and South Korea and mentions the famous night image of the Korean Peninsula in which the North is in dark while the South is glowing as a symbol of cheap electricity and therefore prosperity. But it should be known that the South began its economic growth under the dictatorship of General Park Chung-hee from 1961 to 1979. Another difficult case to explain is India; famous for being “the world’s biggest democracy” it certainly does not enjoy the same level of growth as authoritarian China.
Germany is another problematic case. From its inception as an independent country in the second half of the nineteenth century until the end of WWII, except for a short period of inclusive institutions under the Weimar Republic, Germany was dominated by extractive institutions. Germany under Bismarck was a country run by the elite. Interestingly the worst economic period was the Weimar phase. Germany was largely ruled by extractive political institutions yet it was economically prosperous and highly innovative.
Acemoglu and Robinson’s book is yet another attempt to explain the rich and poor gap by blaming the poor for their poverty. Interestingly the book is nominated for “Goldman Sachs Business Book of the Year Award”. In his book What Went Wrong? the famous conservative historian Bernard Lewis attempts to answer the same question in relation to the Islamic World: ‘why did the Islamic civilisation fail?’ His argument is very similar to Acemoglu and Robinson’s as well as to Neil Ferguson’s in his book Civilization: The West and the Rest.
The grand theory behind all of these is the modernist theory of development that takes “national societies” as its unit of study, arguing that all nations have to develop via the same fundamental road map. A corollary of this argument is that a more developed country can impose itself as a model on a less developed country. The less developed country has to go through several stages usually dictated by the International Monetary Fund (IMF) beginning with “political development”. The reality is that on a global scale the world economy is run by extremely extractive economic institutions backed by equally extractive political institutions, something which the authors signally fait to recognise. •

Why Nations Fail: The Origin of Power,prosperity, and Poverty by Daron Acemoglu and James A. Robinson Profile Books, London, 2013, 529 pages, £10.99

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