It is something many of us notice: some countries are just better at keeping their people wealthier and happier than others. This, roughly speaking, is what economic development is about: countries making their GDP grow and their citizens wealthy and healthy. Unfortunately, not all countries have the same level of development, nor have
they ever. In response to these trends, there are a number of theories as to why this divergence in economic development has occurred, from cultural factors to geography.
Why Nations Fail, by MIT economist Daron Acemoğlu and Harvard University political scientist James Robinson, introduces a new one: institutions. Development, the book argues, comes down to institutions and how they interact with people, governments, and the economy. Throughout Why Nations Fail, Acemoğlu and Robinson investigate what they see as the fundamental element of development that has long eluded economists and policy makers. Their quest, however, is too ambitious and their focus too narrow.
One thesis and one long story
Despite its voluminous length, the story behind Why Nations Fail is not particularly complicated. What’s more, one might say it is highly repetitive. Acemoğlu and Robinson’s thesis is straightforward: the reasons behind a nation’s failure are the nature of its institutions. From then on the theory and evidence is clear, though the not particularly well organized. The authors put institutions into two categories: extractive and inclusive, based on their behavior towards free markets, private property, innovation, and equality of distribution wealth. Extractive institutions are antithetical to these development vectors; inclusive institutions foster them.
Extractive institutions are exemplified all over the globe, from North Korea, to Belarus, to Cuba. In these cases, political power is in the hands of a usually non-elected minority. In turn, this minority uses the country’s resource to its own advantages, instead of fairly distributing them according to need and potential. Further, as was mostly the case with colonizers in South America or Southeast Asia, the elites stop innovation for the sake of preserving power, eliminate private property other than its own, and restricts international trade in favor of local monopolies. This was seen in Venice in the beginning of the 16th century, and can still be perceived today in poorer countries like Belarus and Venezuela.
This is quite different from the functioning of inclusive institutions, a concept crafted in the image of Western liberal democracies. In these instances, there exists a supposed meritocracy and a liberty to use one’s resources as seen fit. Institutions here are also favorable to free trade and innovation, prizing shared prosperity over preserving the power of elites.
The authors’ idea that extractive institutions make for failed states is made clear at the beginning of each and every chapter, but, other than historical examples, the theory is not much more elaborated upon. They stress the importance of Spanish colonialism and its influence in Central and South America, and how the exclusive institutions that favored the European elite over native populations resonate today with the current economic underdevelopment of most of the continent. And while making the case for role of dictators and political unrest in Africa as the cause of poor growth, they manage to inquire into the causes of the stellar development of Western Europe. The Glorious and Industrial Revolutions in Britain are considered the engines that helped the creation of the British Empire and spread modern economic principles in the present “developed world,” as opposed to negative practices that left other continents in poverty. Overall, each chapter of Why Nations Fail is a historical analysis of a period exemplifying the superiority of these inclusive institutions over exclusive ones.
To anyone familiar with economic history there is nothing new to this account. These examples have been around for a while for those studying international development. Perhaps it is the new jargon that is introduced, talking about institutions rather than political structures, putting everything in an economic context, or talking about institutional macro-policies that makes this book so special. But do the authors have anything original to offer beyond terminology?
The Cultural Hypothesis
As stated before, Daron Acemoğlu and James Robinson are not the first to indulge in historical and economic research as to why nations fail. In fact, a considerable part of their book is focused not only on why nations fail, but also on why other theories don’t work towards explaining this.
The first theory they critique is the Cultural Hypothesis of Development. This hypothesis can be traced back to Max Weber, who argued that Protestant European countries tended to do better economically than Roman Catholic ones due to the influence of religious doctrine on lifestyles. What Weber would dub “The Protestant Work Ethic” is perhaps the best know example of a cultural hypothesis of development. Yet today, according to Acemoğlu and Robinson, economic growth encompasses a far larger group of factors, not merely religion.
More recently, it has been contended that Africa, because of its ethnic tensions and pockets of archaic tribalism, has been left behind in the recent waves of economic development and prosperity. But Acemoğlu and Robinson refuse this assessment. What Africa is lacking, according to their opinion, is not the right culture but the right institutions. Were one to group the continent as a whole into some lost cause of cultural ignorance and incompetence, then what explains the success of Botswana and South Africa in the past years when compared to a considerable number of world countries? The authors make an ultimately convincing case against the Cultural Hypothesis by comparing specific countries’ development, not just whole continents like Africa with the Western hemisphere.
But the cultural theory is not the sole subject of Acemoğlu and Robinson’s criticisms. In fact, they believe their main adversary is the Geography Theory, devised by Jeffery Sachs, an economist at Columbia University, and Jared Diamond, a UCLA geographer best know for his work Guns, Germs, and Steel. Both Sachs and Diamond talk about “geographical luck,” whereby a country’s economic development is largely determined by their position on the globe. Being landlocked, and thus having no direct way of accessing other resources but your own, for example, affects the way a country develops. Where you are determines what you can do, and thus how you can grow economically. This holds true for a many countries.
Nevertheless, the authors of Why Nations Fail dismiss this theory. Taking a historical perspective, Acemoğlu and Robinson contend that a considerable number of countries that were once very prosperous, though not in what is today considered a “geographically advantageous” position, stopped developing once they were colonized and forced into extractive institutions by Western empires. Such was the case for what is now Brazil and Mexico. Further, they mention the case of South Korea, which shares the same culture and geographical characteristics as North Korea, and yet is more prosperous than its more northerly neighbor. Institutions, not placement on the map, were decisive in these instances.
Sachs and Diamond, however, have far more data on their side . Using the Swedish Karolinks Institute of Medicine interactive website, Gapminder, one can readily see that over half of the poor and underdeveloped countries in today’s economy are landlocked, or located on islands far from a mainland. For geography theorists it is probably not surprising to notice that “coastline” nations have higher GDPs and standards of living, whereas “landlocked” countries and isolated islands tend to rank at the bottom of these metric. This is not to say that geography is everything, of course. But it certainly remains an important factor that can make a superpower—or break a small country.
Understanding prosperity and poverty: Too big of a goal?
Acemoğlu and Robinson focus too much on two things: historical events and attacking, in their words, “theories that don’t work.” In general, it is easy for one to agree that institutions matter for why countries flounder or flourish. In numerous occasions we see them stopping what could be prosperous possibilities. But the authors’ simplistically institutional and historical account ultimately falls short, not only because it is too narrow, but also because it raises more questions than it answers: Can there only be one theory that explains development? And what lies behind extractive institutions? Is it human failure at base? Or just historical contingency? A book that claims to explain why nations fail must succeed in solving these complex puzzles.