By Mélisande Denis
Why are some countries rich, and why are others poor? What can account for economic disparities across the world? Analyzing three millennia of world history and focusing on case studies from extremely diverse countries, Daron Acemoglu and James A. Robinson address these questions in their book Why Nations Fail, The Origins of Power, Prosperity and Poverty. They argue that the wealth of a nation is dependent on its economic and political institutions: the more inclusive they are, the more prosperous the country will be. In other words, the key to sustained economic growth lies in open institutions that foster the participation of all the citizens.
The study of the city of Nogales, which is divided between the United States and Mexico, is the starting point of their argumentation: what can explain that, north of the border, American citizens enjoy much better standards of living (in terms of health, education, income or security), than Mexican inhabitants living in the southern part of the town? How can one border justify such a gap? D. Acemoglu and J. Robinson reckon that the major difference between the two countries is that American institutions have created a more conducive environment for economic growth than those of Mexico. Indeed, in the US, property rights are enforced, a level playing field is established, and investment in new technologies and skills is strongly encouraged: anyone willing to start a business in the US can do so without fearing arbitrary expropriation or unfair competition. State governments and the federal administration, which are democratically elected, are responsible for ensuring that equal chances are given to everyone; and, if they feel that they are being unfairly treated, citizens can rely on other institutions to defend their rights. Political institutions are centralized, designed to fight corruption, and enforce law and order across the country, hence fostering economic success. On the contrary, in Mexico, democracy is no second nature, and political institutions are more extractive: corruption is endemic and property rights are fragile. Creating a company in Mexico is a highly risky business, as monopolies and strong relations between politicians and large firms threaten smaller entrepreneurs’ interests. Institutions are partly designed to extract resources from the many by the few, and thus fail to provide incentives for economic activities. In short, inhabitants of the southern part of Nogales are poorer than those in the north because their institutions are not inclusive: the less people are encouraged to take part in business activities, the slower their economy will grow.
This is not to say that extractive institutions are inconsistent with economic growth: in order to have more to extract, political elites would, in theory, favor prosperity. But, as they extend their argumentation to different situations across time and space – ranging from the Soviet Union to the Kuba Kingdom in the actual DRC, through the recent rise of China – D. Acemoglu and J. Robinson argue that growth under this kind of institutions cannot be sustainable. Indeed, innovation is necessary for economic development, but with innovation comes creative destruction (meaning that older techniques and skills are replaced by new ones) which tends to destabilize established power relations. Elites thus fear innovation and tend to prevent it, and by doing so, hinder economic success. More than that, the fact that they benefit greatly at the expense of the rest of society means that power is highly coveted: political instability is often the rule in extractive environments, which prevents businesses from developing.
Economic disparities across the world depend thus on political institutions: the less inclusive they are, the more those in power are tempted to seek their own interests, and the more detrimental it is to their national economy. On the contrary, political institutions which distribute power in a pluralistic manner guarantee that various interests can compete, and that their economy will thrive. But why have some nations developed inclusive institutions, while others have not? As they review ruptures such as the Glorious Revolution in England, the signature of the American Constitution, or the Meiji Restoration in Japan, the authors reckon that these evolutions are mostly a matter of small differences. In fact, little divergences – such as the existence of broad coalitions that have a relative hold on power or the presence of some degree of centralization – have proven extremely meaningful during critical junctures. In the UK for instance, the fact that the Parliament had some influence over the monarchy in the fifteenth century (due to various historical circumstances) meant that the opening of the transatlantic trade could benefit a larger segment of the population, instead of only the Crown. And, as their economic power increased, they were gradually able to effect political change towards more inclusive institutions. Contingency and small differences are thus key elements of the book’s theory: had parliament not held this kind of power at this particular time, the Glorious Revolution might not have occurred this early.
This perspective necessarily constrains the predictive power of the authors’ approach, but D. Acemoglu and J. Robinson acknowledge and embrace the limit of their work, as they claim that it discredits any theory based on historical determinism. Prosperity and poverty are not given, but depend on the institutional drift of nations, which can hardly be anticipated. The major strength of their study is thus that it offers an innovative approach to the questions of economic development, which challenges formerly established theories. Indeed, the example of Nogales, one single city with very different levels of development, helps dismiss the geographical and cultural approaches (the former using climatic and territorial disparities to explain differences in development; the latter focusing on cultural factors, and claiming that some civilizations are ill-adapted to engineer economic growth). In the same way, the elites’ tendency to resist creative destruction challenges the ignorance theory, which considers that leaders do not foster development because they simply do not know how to do so: quite often, those in power are aware that their decisions are impairing national growth, but they decide to favor their own interests nonetheless. Why Nations Fail thus presents a creative theory to explain the origins of prosperity and poverty; and the variety of cases presented, which are highly readable and well-documented, makes the authors’ arguments all the more compelling.
About the reviewer
Mélisande Denis worked with UONGOZI Institute a Research and Policy Intern between 2015 – 2016. She was also a member of the Institute’s Resource Centre.