A Review of Why Nations Fail: The Origins of Power, Prosperity and Poverty by James Robinson and Daron Acemoglu

Book reviewed

Acemoglu, D. Robinson, J. Why Nations Fail: The Origins of Power, Prosperity and Poverty. First edition. March 20, 2012. Crown Publishing Group. New York. 556 p. Approximate price: $17.25.


Introduction

Can a nation rise from rags to riches? Is the well-being of a country historically predetermined?

This book explains why some countries flourish while others flounder, with historical and contemporary examples. Robinson and Acemoglu argue that institutions, rather than geographic or cultural factors, determine whether a country prospers.


Rebuking alternative theories

The interplay of groups that struggle for power plays a key role in forming institutions. For example, the people of North and South Korea have a common language and customs and live on the same peninsula but drastically differ in living standards. Incomes in Nogales, Sonora in Mexico average about one-third those of Nogales, United States, in spite of sharing the same climate and locale.


Classification of institutions

The authors classify a country’s institutions as extractive or inclusive, depending on whether the ruling elite allows common people economic and political freedom. Prosperity under extractive institutions is possible in the short run, yet influential groups under them resist political and economic changes resulting from technological progress. These changes cause people in declining sectors to lose their jobs, and they redistribute political power -- a process that the economist Joseph Schumpeter called creative destruction. Inclusive institutions are more conducive to sustainable development.


Conditions for inclusiveness

Robinson and Acemoglu identify several conditions for inclusive institutions to develop. The country must have a centralized government. Without this, clan or regional leaders have vested interests in perpetuating a rigid hierarchy. The power of the ruling party or leader should be limited. Robinson and Acemoglu characterize communism as “the new absolutism,” under which the all-powerful Communist party leaders crack down on the opposition and on entrepreneurs. They admit that the USSR grew rapidly until the 1970s but note that it then slowed considerably. Yet having a market economy is not a sufficient condition for inclusive institutions. Property rights and other rights should be enforced and equally apply to all adult citizens. Monopoly regulations should prevent abuses of market power. Monopolies should not influence politics and implementation of laws. Patents must be enforced. There is a positive relationship between political and economic freedom, and both are important for the functioning of inclusive institutions. Authoritarian countries with growing economies that allow some private property and free trade, such as China, are likely to fail in the future, since the ruling party impedes the development of businesses that it does not favor.


Major historical examples

Robinson and Acemoglu give bright examples from different historical periods and parts of the world of how extractive institutions triggered failure. For instance, the Roman Republic performed better than the Roman Empire. There was a large increase in shipbuilding and mining under the Republic, but technology stagnated in the imperial period.

Venice was a wealthy city-state during the Middle Ages, having developed independent magistrates, courts, and pre-eminent contract laws. Over time, however, the ruling elites resisted creative destruction and repressed newcomers politically. Eventually, they nationalized trade and the city-state declined economically.

When the Spanish conquered Latin America, they created extractive institutions, relying on forced labor of Native Americans and importing slaves from Africa. The Aztec and Inca civilizations also had extractive institutions that weakened their countries by the time the Spaniards arrived. Reliance on forced labor and market distortions were also common in Africa, both during the colonial period and after these countries became independent.

On the other hand, North America was sparsely populated and lacked gold for exports, so the English settlers who came there had to farm for themselves. The South of what became the United States was an exception to the rule, but slave labor did not generate as much wealth as free labor, leading to the abolition of slavery after the Civil War. The same was true for Australia. These colonists demanded freedom. Power in England itself has been more dispersed than in other centralized European monarchies since the signing of the Magna Carta in 1215. Nevertheless, under Tudor absolutism, not only did the power of the Crown strengthen but monopolies dominated the economy. However, after the Glorious Revolution of 1688, economic and political power became more dispersed, most monopolies were abolished, patents were better enforced, and taxation became more reasonable.

France, another major European power, was a center of absolutism until the French Revolution. After the Revolution, the nobility and the clergy lost their privileges. Napoleon Bonaparte partially restored the hierarchy, but his regime was less extractive than that of the pre-revolutionary kings. In countries that Napoleon conquered, serfdom was abolished, but countries that resisted his army, such as Russia, retained serfdom for longer periods. This contrasts with the Soviet and Russian interpretation of history, in which Napoleon is portrayed unambiguously as a tyrant and Russia as a liberator of Europe from his army.


The vicious and the virtuous circles

Rich countries tend to stay rich; poor countries tend to stay poor. There is a reason for that. The beneficiaries from the status quo in poor countries are wealthy and well-organized. They have the means and incentives to resist changes that can eliminate their dominance in economics and politics, prolonging the vicious circle. Pluralism and the rule of law in richer countries imply representation of different groups in the government. The elite have incentives to encourage innovation and progress, rather than to resist it, prolonging the virtuous circle. Nevertheless, institutions may become more inclusive or more extractive over time, making the country richer or poorer.

Foreign aid

Robinson and Acemoglu also noted that foreign aid is ineffective at pulling poor countries out of poverty. The local elites and the international organizations that administer aid waste the money on overhead or launder it. Only about 10-20% of aid reaches the recipients, even if aid is provided conditionally. Yet the authors argue that this is not a reason to stop providing foreign aid but a reason to reform institutions. Most citizens of developed countries believe that poor countries should receive foreign aid, so its provision will not be abolished.


Limitations

Robinson and Acemoglu do not attempt to explain whether economic freedom leads to political freedom, or vice versa. Their theory does not explain why Singapore, whose government cracks down on the opposition and censors the press, ranks second on the Index of Economic Freedom this year, reports Heritage Foundation. One cannot tell from reading the book whether governments should spend extensively on welfare services or leave more services to the market.

The book does not mention the inefficiencies and populist policies that may still occur under inclusive institutions. Governments may spend excessively or inadequately on different sectors and adopt inefficient tax systems, not to favor vested interests of the elite but to gain the majority of votes in future elections. For example, governments may initiate fiscal expansions prior to re-election and reverse them later -- but with worse consequences that could have occurred had the expansion not been initiated. Some developed countries may perform worse under recessions or experience slower growth in some sectors or in overall GDP than some rapidly developing economies do. However, the authors analyze well why vested interests of the elite under extractive institutions make the economic problems of developing countries more severe and longer-lasting.

Robinson and Acemoglu could have included many more studies, particularly examples of historical regions differing from the rest of their countries at the time. They discuss in detail only one such region: the American South. They could have analyzed why the Roman Empire fell, while its eastern part, the Byzantine Empire, prospered centuries later under Emperor Justinian. Germany, which has the largest economy in the European Union, would be another interesting case study. It was decentralized until the 19th century, faced defeat in two World Wars, faced hyperinflation under the democratic Weimar Republic, recovered economically under the Nazi regime until war destroyed it, and was split into two countries, until reunification in 1990.

Conclusion

Robinson and Acemoglu provide substantial evidence to show the leading role of institutions in making a country rich or poor. I recommend the book as a good historical illustration of the universality of recommendations from contemporary economists and political theorists.


References

Heritage Foundation. Singapore. https://www.heritage.org/index/country/singapore. 2018