Isobel Coleman

Democracy in Development

Coleman maps the intersections between political reform, economic growth, and U.S. policy in the developing world.

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Why Nations Fail

by Isobel Coleman
April 17, 2012

Employees make air-conditioners along a production line at a factory in Hefei, China in July 2011 (Jianan Yu/Courtesy Reuters). Employees make air-conditioners along a production line at a factory in Hefei, China in July 2011 (Jianan Yu/Courtesy Reuters).

Yesterday I had the pleasure of hosting MIT economist Daron Acemoglu for an on-the-record meeting at the Council on Foreign Relations to discuss his book, Why Nations Fail, which he recently published with co-author James Robinson. It is enjoying its third week on the New York Times best-seller list (an accomplishment for any book, but especially for one by two economists that clocks in at 462 pages). Why Nations Fail tackles a question that has bedeviled experts for centuries: why are some nations rich while others are poor? Acemoglu and Robinson’s answer is straightforward – it all depends on institutions. Successful nations have good institutions that are “inclusive” and “pluralistic” and create incentives for people to work hard and invest in the future. Unsuccessful states, on the other hand, are characterized by “extractive” or “absolutist” institutions that economically and politically benefit a small group of elites at the expense of everyone else.

This sounds pretty obvious, and Acemoglu acknowledges that his work stands on the “shoulders of giants” like Adam Smith. (Smith, after all, recognized some 250 years ago that economic growth depends on “peace, easy taxes, and a tolerable administration of justice.”) But a whole host of competing theories have emerged in recent decades, suggesting that national success depends in large part on other factors such as geography, or climate, or culture, or technocratic expertise, or health (think Jared Diamond’s 1997 book Guns, Germs, and Steel). When pressed on this point in the meeting, Acemoglu acknowledged that he and Robinson do not totally dismiss other factors, but they insist that they are not causal. After all, he noted, more than half the world’s population today lives in “lucky latitudes” (latitudes that facilitated agriculture and settlement during early human history), yet with markedly different outcomes.

Acemoglu’s observations on China are particularly interesting. He grants that countries with extractive institutions can experience robust growth, but only for a while. Consequently, he says that China can continue to grow rapidly for another 15-20 years because it is “playing catch-up” and relying on imported technologies. But eventually it will have to move to a more innovative economy, one that allows for Schumpeter-style creative destruction. That will require more inclusive, pluralistic institutions that inherently threaten the entrenched position of elites. Without such a transition, Acemoglu predicts, China’s impressive growth “will evaporate.”

He also offers cautionary comments for the United States, drawing parallels with the Venetian Republic, which grew rich and powerful in the 12th-14th centuries on the back of inclusive institutions but then allowed extractive institutions to take over, saw its prosperity dissipate, and drifted toward irrelevancy. Acemoglu expresses concern that political and economic inequality in the United States is growing, pointing to the rise of super PACs as a particularly troubling leading indicator. But he remains cautiously optimistic about America’s ability to rejuvenate itself. “The U.S. was here before, during the Gilded Age,” he says, noting that a progressive agenda countered the tilt toward more extractive institutions in favor of inclusivity.

Why Nations Fail has been widely and mostly positively reviewed (by the Economist, by Martin Wolf in the Financial Times, and NYU professor William Easterly in the Wall Street Journal, among others). In his review, however, Francis Fukuyama identifies a conceptual problem with the book: the terms inclusive/extractive and absolutist/pluralistic are so broad that it is hard to “come up with a clear metric of either. It also makes it hard to falsify any of [the authors’] historical claims.” This is true, but it does not diminish how fascinating it is to read those historical accounts. At the end of the CFR meeting, Acemoglu was asked why he and Robinson didn’t call the book Why Nations Succeed. Figuring out why nations fail is hard, he said, but understanding why they succeed is even harder. Perhaps that will be the next book.

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  • Posted by Franz Gatzweiler

    The book by Acemoglu and Robinson is inspiring, eye- and mind opening, especially for those not yet familiar with the idea of institutions structuring human societies and development. The book is very rich of historical examples underlining the theory of extractive and inclusive institutions, leading to either prosperity or failure of nations. After reading the book, which is recommended, one sees the world in a different way and one becomes aware of extractive institutions nearly everywhere: Bangladeshi workers in the garment factories, the domestic workers, the agricultural laborers, children working for little or no wages, generally poverty and environmental destruction – all are the result of extractive institutions.
    The problem is that the institutional theory is rather broad and every example provided by the authors can also be explained entirely by extractive institutions only – also the success of the developed and democratic nations. Another problem is that the authors cannot draw a clear line between extractive institutions and inclusive institutions. But that is not so much a problem created by the authors as it lies in the nature of institutions: Every type of institution always includes some and excludes others because institutions are specific with regards to whom the apply. What is also outstanding is the neglect to reflect on the institutions in place in the USA and other developed nations, which may have the most extractive institutions of all nations today.
    Let us set up a counter-hypothesis: only extractive institutions are at play and explain economic growth – on different levels of society, by different actors, and by different numbers of actors with more or less privileges and power. The smaller the group of actors benefiting from effective extractive institutions and the greater the inequality between the rents they extract and those of the rest of society, the less likely it is that they can keep the extractive institutions in place for long. Depending on the extent of political power they have, of course. At some point redistribution of wealth from extraction will occur, either peacefully or violently.
    Not only a minority of elites in developing countries set up and benefit extractive institutions. Also a majority population or entire nations can benefit from extractive institutions, for example by dictating the terms of international trade and subsidizing their agricultural sectors. America is operating under extractive institutions despite its democratic political system – or maybe because of the opportunities it creates for economically powerful elites intertwined with the political elites. Rightly the authors point to the fact that political and economic markets interplay. A look at the situation in America shows that the less economically empowered are basically politically disempowered. Those are for example the farmers forced to grow seeds provided by multinational companies or the lower income population (economically) forced to buy and eat cheap and unhealthy food produced with subsidized maize and soybeans – just those crops which are protected by patents held by the same multinationals. The food industry in America which has spread far across its borders, is an example of extractive institutions at play par excellence.
    So its not enough to set up these two categories of extractive and inclusive institutions with only one measure of success: economic growth and prosperity. Just like you need to look at the multidimensionality of poverty in order to understand it better, you need to look at the entire quality of life and that of the natural environment, which is the ultimate basis for life. Rising income inequality, decreasing happiness and degrading natural environments are indicators of extractive institutions at play also in the developed world. Maybe it is just not as visible for those residing within the nations benefiting from extraction.
    Both, the developed and developing nations are operating under extractive institutions. It is just more obvious when seeing poverty on the streets of Dhaka or Delhi or unimaginable riches of dictators in Africa or Russia. Who is to judge how much is enough? These are the more pressing question of today: How many people need to benefit from extraction before extractive institutions become inclusive and how extractive can we be before the earth’s life support systems collapse?

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