Why Do Nations Fail?

The new blockbuster by Daron Acemoglu and James Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty, has attracted a lot of attention. This is down to their stellar reputation for their academic work exploring the links between institutions and economic and developmental outcomes, work which has earned them a large club of admirers over the years. The paper Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution - published in 2002, with Simon Johnson a co-author – is a particular landmark in putting the quality of political and economic institutions centre stage in discussions about economic development.

No wonder everyone was so excited about this book. It draws together the authors’ body of work analysing the way institutions either contribute to or hold back growth. Its range is vast – all of human history is here, from Neolithic settlement via the Inca and Aztec empires to modern Britain. I read a lot of history, and yet learnt new things from this book. While already knowing a fair bit about the Glorious Revolution of 1688 (and welcoming the emphasis placed here on its often-underrated importance), I’d never come across the “Black Act” of 1723 before – to give it its full title, “An Act for the more effectual punishing wicked and evil disposed Persons going armed in Disguise and doing Injuries and Violence to the Persons and Properties of His Majesty’s Subject, and for the more speedy bringing the Offenders to Justice.”

The book’s thesis is of course that institutions are what matter for economic development. An early chapter dismisses the main alternative explanations – geography, culture, and policy ignorance. Specifically, the authors argue that a successful institutional framework needs two characteristics: it must be inclusive so that members of a society have some means of shaping economic allocations; and it must be sufficiently centralized that the state is effective. Unsuccessful economies are either exploitative and authoritarian or have a central political authority unable to take decisions that benefit the whole; in either case rent-seeking minorities are able to prevent the kind of innovation, and consequent redistribution of economic power, that in the long run is necessary for growth.

Accidents of history matter too – as one chapter spells out, a small divergence due to chance can end up taking two similar countries on completely different long run trajectories. They also point out that exploitative or extractive states can grow for long periods – the Soviet Union is one example, whose ultimate economic failure did not become really apparent until around 1980. Here is another excellent example of this point, comparing the two Koreas.

It is hard to argue with the basics of this argument, although worth remembering that most economists have only relatively recently become sensitized to the importance of institutions, and the intertwining of the economic and political. There have been honourable exceptions – Oliver Williamson and Elinor Ostrom of course in their different fields. I was surprised Acemoglu and Robinson did not make more of Mancur Olson’s contribution, especially as this book opens with exactly the same point as his famous article Big Bills Left on the Sidewalk (pdf). However, this perspective has become mainstream now.

Having said that, I was disappointed with Why Nations Fail. A minor reason is that it’s a baggy book in need of a vigorous old-fashioned edit – at various points I had read a few pages about some historical detail and then couldn’t remember why this was relevant. A more important reason is that they fail to define clearly, ahead of the historical detail, what kinds of institution count as inclusive, and what makes a state adequately ‘centralized’. That might even be a misleading word. It kept me wondering what geographies they had in mind – centralized over what domain and what powers? But what I think they mean is more the effectiveness of the state in its application of the law and its monopoly of legitimate violence. As for ‘inclusive’, in the end what they mean seemed circular – the countries which had enjoyed long run economic success were the ones that had successful institutions.The book is oddly less persuasive than their earlier academic work because of this vagueness.

Still, this book is to be welcomed for cementing the rebirth of political economy. The emphasis on how important it is to prevent narrow interests from capturing political power to exercise in its own economic interest is just as relevant to the financial oligopolies of the West as to the failed or failing states of Africa. It is possible to have an economy run by the elite for the elite at any level of development, as we can now see clearly. Policy makers in the US and Europe should read this as a warning.

Why Nations Fail is also a great introduction to this field for people who are not so familiar with it, and indeed for those who are sceptical about whether, post-crisis, economics has anything to contribute to public debate.

I wrote this review before reading any of the others. But here are links to reviews by William Easterly and Nancy Birdsall (scroll down).