Why Nations Fail – The Origins of Power, Prosperity and Poverty is a well written, engaging and fascinating read, with coherent and very believable arguments and some important recommendations for policy. There’s a vast wealth of supporting case studies to back up the arguments and to support the model of development that is presented – It’s a book that provides a great framework to hang much of world history on.
The model: Inclusive and Extractive Economic and Political Systems
The main argument, as I understand it, is that sustainable economic growth depends on both inclusive economic institutions and inclusive political institutions.
Inclusive economic institutions have two main characteristics:
They enforce secure property rights – people can be confident that they truly own what they own and that a higher power won’t take it away from them. This relies on the rule of law.
They provide people with economic incentives to innovate. They must be sure that they will reap the benefits of any investments in time and money they make beyond the minimum to survive.
Inclusive political institutions have centralised control over a territory, and a broad group of interests re represented. No one group is able to gain control over the political agenda without some countervailing force.
Once established, inclusive economic institutions and inclusive political institutions reinforce each other through a virtuous cycle. Inclusive economic institutions provide the foundation on which inclusive political institutions can flourish, and inclusive political institutions restrict the ability for particular groups to subvert the inclusive economic institutions for their own ends. The media also play a positive role here by highlighting abuses of power so that opposed interests can mobilise to prevent them – the example of US farm interests in mobilising against monopoly abuses of the Trusts is given.
Extractive economic and political institutions, by contrast, are dominated by a single individual or group who use political power to extract wealth out of the economy for their own ends.
Although growth is possible under extractive institutions, this growth is destined to fizzle out since it lacks the capacity or incentive to allow true innovation which involves creative destruction. Creative destruction is resisted by the absolute ruler(s) as a potential challenge to the status quo and their ability to retain power and continue to extract wealth. The Soviet Union would be an example of this – impressive growth rates were achieved for some decades, but these were due to a one-off reallocation of under-utilised resources from agriculture into industry. Once this had largely been done, growth faded as there was no innovation and creative destruction. The ability of a single group to extract wealth from the economy without challenge through the political system also creates an incentive for other single groups to seize power and continue to extract for themselves, which leads to instability and this is a vicious cycle..
How did we get where we are today? Why are some nations poor and others rich?
There is a strong correlation between inclusive economic and political institutions today, and wealth. So how did some countries come to have inclusive economic and political institutions whilst others didn’t?
A contingent model of history is presented, whereby the path a country takes is based on the interplay between it’s existing economic and political institutions at the time specific critical junctures – essentially large exogenous shocks to the system – occur. The same critical junction will have different impacts on different countries depending on the state of their institutions at the time, and small differences in the initial starting position can have large differences in the path of development. The specific impact on different countries is also contingent, and can be significantly influenced by disease, the weather or the personalities of the people involved.
Societies are able to move from extractive to inclusive if they have a broad coalition in favour of change with the power to force change at the time of a critical juncture. A great example would be the opening of European trade with the Americas. Spanish and French activity in the Americas was sponsored by the monarchy, and the rewards of the activity largely accrued to the existing elites in those countries. By contrast, the British colonists were largely independent of the British crown, and were able to make themselves rich. This created a rich merchant group in Britain that was opposed to rule by an absolute monarch, a situation that eventually played out the 1688 Glorious Revolution, which in turn laid the groundwork for further developments that made Britain the birthplace of the Industrial Revolution. The ability to change from extractive to inclusive is also dependent to some extent on the incentive the current elite has to defend it’s position, and this depends on the extent of their stake in the existing system – slave societies for example are extremely lucrative – and the degree to which specific reforms would hinder their ability to extract. At some stage the elite may make the calculation that it’s in their interest to give away a specific point in order to protect the overall system.
How does this model contrast with other models of development?
The model is contrasted with various types of Geographic models – essentially the argument that certain societies are poorer than others because of some geographical feature – poor soil for crops, or susceptibility to tropical disease for example, or Ignorance models – societies are poor because their rulers don’t understand and implement the correct policies. The Washington Consensus of the IMF and World Bank uses this model with it’s emphasis on encouraging economics to implement specific reforms in return for funding.
The Geographic model is unable to explain differences in the economic well being of towns and countries that are contiguous to each other – towns along the US/Mexico border for example – and the Ignorance model misses the point – the point isn’t that the elites don’t know what would be needed to foster economic growth, it is that they have an incentive to resist these policies and maintain the status quo. Many examples are given of elites that implemented policies that actively slowed or stunted development to protect their own interests.
What are the policy implications
There are two clear policy implications from the book:
1 – Stop pouring aid into extractive regimes – the aid will only strengthen the regime – and since the regime itself is the problem, it will continue to hinder growth, and
2 – Stop supporting authoritarian growth as a model for Africa, Latin America and Asia. Although there are apparent examples of the authoritarian model producing great results, and over long periods of time, the model is fundamentally flawed in the long term and is not sustainable.
Why Nations Fail is the most interesting book I’ve read in a long time, and it has spurred quite a lot of internal debate within Neilsonparc. There are a few aspects of the model that I take issue with however..
Firstly, I’m not 100% convinced about the motor for change – critical junctures acting on existing institutional arrangements. I don’t feel that ‘critical junctures’ are well defined in the book – what makes something a critical juncture rather than just an event or series of events? Do critical junctures operate at the global level or are some local? In our history books we are constantly being told that such-and-such an event is a critical turning point for history – the Battle of Bosworth, Pearl Harbour, France’s change of alliance from Prussia to Austria etc etc.. We’re invited to imagine alternative worlds that would have resulted had these events not occurred, and the imagination can see that the world would indeed have been very different. Are all of these then critical junctures? Is there some sort of hierarchy of critical junctures?
A more convincing model for me would be a model that posits that every day the situation in every society changes slightly for a whole variety of reasons, some internal and some external. There is a constant tension between those with power and those without, and this plays out every day in the group(s) with power considering whether they need to make the smallest possible concession to those without in order to protect their overall position, or whether they can roll back previous concessions as no longer necessary. Those without power, similarly, are daily considering whether they now have enough power to mount a challenge, how to mount it, what the issue will be that they base the challenge on, how much support they think they have, from whom, and how much resistance they think the existing elite(s) will put up. Over time the weight of small changes builds up until a tipping point is reached, and one of the antagonists acts.
Secondly, and related to the above. I feel that more could have been made of the apparent pattern that the meaningful changes from exclusive to inclusive institutions all appear to have been forced through by Revolution, not by incremental change.
Thirdly, I don’t feel that the book correctly reflects the role of the media – media censorship is addressed, and the media is held up as a positive force for change in highlighting abuses of power that interest groups can then rally against. But day-to-day the media plays a much more important role in supporting the existing status quo – it is actively used by the existing elites to divert attention from inconvenient issues and to manipulate and shape opinion in favour of the status quo. Mass media is owned by, and used by the existing elites, not outsider groups. It’s veneer of independence – useful in establishing credibility and thus audience – is in picking up and talking about issues that are essentially internal squabbles within sections of the existing elite. Social media may be different, but this distinction wasn’t made clearly enough in the book.
Fourth, there’s an implication, not explicitly stated by certainly implied, that inclusive economic and political institutions are actually fully inclusive. But the societies used as examples of inclusive societies (Western Europe and North America, for example) are still societies that are ruled by elites that extract wealth – yes, the elites are more broad-based than the societies that are used as examples of exclusive societies, but this is not government of the people by the people. I think the choice of the word ‘inclusive’ is problematic.
Fifth, there is an implication that economic growth is the sole measure that’s important. But what of the ‘happiness index’, healthcare provision. Yes, capitalism as a system is the best system for creating stuff, but after a point we just don’t need more stuff, we need more time and more meaning. Capitalists however do need us to want more stuff – that’s how they extract wealth. Are these societies that are creating more stuff really better societies – is this the goal we should be aiming for. Would the inclusive societies that are held up as the model, be the best societies for taking us the next level – or would it be the ‘authoritarian’ Chinese model? I know which I’ve got my money on.
And finally, I’m not convinced that the case against the Authoritarian model has been fully made. Acemoglu and Robinson concede that the model can work for a period of time, it has a role and can solve certain problems for certain societies. Maybe there is a role for this model to correct problems and or help certain societies to catch up? Then once that has been achieved we look for something else. And maybe authoritarian regimes can yet find a way of create true innovation, and dealing with creative destruction. I’m not at all convinced that the Chinese government aren’t capable of doing this.
Otherwise, a superb read that I would happily recommend. 10/10.