Why Nations Fail: A Review

Why do some countries grow and others stagnate? Why did growth emerge in a few countries in the second half of the 18th century (but not in others), after a millennium of hardly any increase in world per-capita income, and why in Britain?

These are big questions that Daron Acemoglu and James A. Robinson tackle in an ambitious book that aims to change the way that economists and others think about growth. It is a book that needs to be read, its ideas understood.

Rich countries are rich and poor countries are poor because of their economic and political institutions, according to the authors.

Rich countries are organized around what the authors call “inclusive” political and economic institutions. Inclusive institutions give the average person a voice in the political realm. In the economic realm, they establish a level playing field, protect property rights, offer the average person opportunities to rise up, and reward innovation.

Poor countries are poor because they are organized around “extractive” institutions. An extractive economic institution is one designed to extract resources from many by the few. These institutions are the norm, not the exception.

“Poor countries are poor not because of their geographies or cultures or because their leaders do not know which policies will enrich their citizens.” Poor countries are poor because of their institutions.

Most economists would agree that institutions are important for growth. What sets the authors’ theory apart from others is their claim that institutions matter much more than anything else. Geography (i.e., natural resources, location, and climate), culture, and visionary leaders are secondary. Growth is mostly about a country’s institutions.

North and South Korea’s institutions are examples of each. These countries share a similar geography, history, and culture. Both were poor 60 years ago. But South Korea’s institutions (inclusive) evolved much differently from those of the North (extractive), which is why per-capita income is more than 10 times higher in the South than in the North, according to the authors.

Growth in authoritarian regimes is possible. Sustained growth is not. China, for example, has grown under extractive political institutions. But its growth is “catch-up” from a low base, and its economy will eventually run out of steam (“unless it undergoes a fundamental political transformation towards inclusive political institutions”) just as the Soviet Union’s economy eventually ran out of steam, according to the authors. A better model for growth is Botswana, a landlocked country in southern Africa, and one of the world’s fastest growing since gaining independence in 1966. This country, which has an unblemished record of democracy since independence, leveraged diamond wealth to invest in infrastructure and schools, during periods when other African countries (with extractive institutions) were using diamonds to build armies to protect the wealth of an elite few.

Also setting this study apart from others is its approach. Economists over the past half century have analyzed growth using tightly constructed mathematical models. This book contains no equations, no proofs, not a single regression. The theory is developed using vivid historical examples. Maps instead of eye-glazing tables and charts are used to illustrate key points. This approach allows them to both reach a wide audience, as well as dig deeper into the fundamental causes of growth.

At one level, economists understand growth well. Robert Solow’s pioneering research on growth a half century ago and subsequent work by other economists established that innovations, as well as investments in human and physical capital, explained why some countries succeeded and others did not. But why have some countries followed the winning strategy of innovating and investing in physical and human capital while others have not? Answering this fundamental question requires tossing out the math, and adding history and politics to the brew. Acemoglu and Robinson are not the only economists to follow this approach. But they have dug deeper than the handful of others who have followed this path—and have hit gold.

Other key points made in the book:

• A pivotal event in human history was the Glorious Revolution (1688), when parliament overthrew King James II of England, replacing him with a constitutional monarchy, paving the way for the Industrial Revolution.

“The Industrial Revolution started and made its biggest strides in England because of her uniquely inclusive economic institutions. These in turn were built on foundations laid by the inclusive political institutions brought about by the Glorious Revolution. It was the Glorious Revolution that strengthened and rationalized property rights, improved financial markets, undermined state-sanctioned monopolies in foreign trade, and removed barriers to the expansion of industry.”

• Strong central governments are essential for growth, since they are needed to establish the rule of law and enforce property rights and contracts.
• The divide between rich and poor countries took place over 150 years ago. Since then, a few countries, such as South Korea and Singapore, have moved up and others, such as Argentina, have moved down. But mostly, those at the top and those at the bottom 150 years ago remain there.
• The authors are not among those who believe that economic prosperity or a more-educated workforce eventually lead to more democracy and inclusive institutions.
• They see foreign aid as a failure, but are not against it, since the small portion that filters through to the intended beneficiaries is better than nothing. They are also deeply skeptical about the current practice by Western economists of attempting to engineer prosperity by advising foreign governments.

A body of research’s importance can be gauged by how often it is cited by subsequent research. This book will be heavily cited and will generate a lot of high-powered research. That alone is one reason to pick it up. But a better one is that it is just a good read.

by Patrick Newport