Why Nations Fail by Daron Acemoglu and James Robinson

Friday, October 14, 2016

Two US academics offer a compelling analysis of the world’s financial malaise

 Reviewed by Paul Collier

As the turbulence of global economic crisis starts to recede, the two fundamental features of the world economy in our times re-emerge. One is the gap between rich and poor countries. Two hundred years ago, there was no such gap, at least not on the scale we are used to today; nor, most probably, will there be one in 200 years’ time. But the present reality is of astounding difference: the same people can live in abject poverty in one country, yet be prosperous once they move to another.

This book takes the graphic example of the twin towns of Nogales, one on the Mexican side of the border, the other on the American side: why does a border make such a difference? Self-evidently, this question matters, because unacceptable global inequality generates other brute facts: the psychologies of guilt and resentment; escalating pressures for migration; and the nightmare choices that face the world when some nations do not merely fall behind, but fall apart.

Scholars have struggled for decades to find a convincing answer. Often, the direction of search has been technocratic. In the 1960s, the dominant explanation was that poor countries lacked capital; by the 1980s, it was that they had poor economic policies.

The last decade has appeared to offer a new and potent clue: the ascent of China, which is the other fundamental feature of our times. China’s growth is an economic phenomenon without precedent that has implications both for poverty and geopolitics. It has lifted millions out of penury and the country is projected soon to topple America from its position as the world’s largest economy. The beacon offered by China has been widely interpreted, especially by African elites, as demonstrating the benefits of autocracy.

For anyone remotely interested in these issues Why Nations Fail is a must-read. Acemoglu and Robinson are intellectual heavyweights of the first rank, the one a professor of economics at MIT, the other a professor of political science at Harvard. Mostly, such people write only for other academics. In this book, they have done you the courtesy of writing a book that while at the intellectual cutting edge is not just readable but engrossing. This alone would be reason to take notice: a vital topic, top scholars, and a well-written book.

But this is not the half of it. The reason that Why Nations Fail is not to be missed is that their thesis pulls apart the two big brute facts of global development. Far from seeing China as the clue to spreading prosperity, Acemoglu and Robinson see it as yet another instance of a society rushing into a cul-de-sac. China is not, on their analysis, on course for our own level of prosperity.

Their argument is that the modern level of prosperity rests upon political foundations. Proximately, prosperity is generated by investment and innovation, but these are acts of faith: investors and innovators must have credible reasons to think that, if successful, they will not be plundered by the powerful.

For the polity to provide such reassurance, two conditions have to hold: power has to be centralised and the institutions of power have to be inclusive. Without centralised power, there is disorder, which is anathema to investment.

China most certainly ticks this box – it has centralised power and order in spades. Some African societies don’t; localised power usurps the authority of the state. But China resoundingly fails to tick the box of inclusive institutions. Acemoglu and Robinson quote a summary of the structure of Chinese political power: “The party controls the armed forces; the party controls cadres; and the party controls the news.”

That states need order to prosper is important but no longer controversial. That they need inclusive institutions is, in view of China’s success, wildly controversial. Their argument is that order without inclusive institutions may enable an economy to escape poverty, but will not permit the full ascent to modern prosperity. Their explanation is that if the institutions of power enable the elite to serve its own interest – a structure they term “extractive institutions” – the interests of the elite come to collide with, and prevail over, those of the mass of the population.

So, if inclusive institutions are necessary, how do they come about? Again, Acemoglu and Robinson are radical. They argue that there is no natural process whereby rising prosperity in an autocracy evolves into inclusion. Rather, it is only in the interest of the elite to cede power to inclusive institutions if confronted by something even worse, namely the prospect of revolution. The foundations of prosperity are political struggle against privilege.

A thesis can be summarised, albeit crudely, in a short review. Yet the main strength of this book is beyond the power of summary: it is packed, from beginning to end, with historical vignettes that are both erudite and fascinating. As Jared Diamond says on the cover: “It will make you a spellbinder at parties.” But it will also make you think.

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