The American Interest
Democracy, Development & the Rule of Law
Published on March 26, 2012
Acemoglu and Robinson on Why Nations Fail

Daron Acemoglu and James Robinson have just published Why Nations Fail, a big book on development that will attract a lot of attention. The latest fad in development studies has been to conduct controlled randomized experiments on a host of micro-questions, such as whether co-payments for mosquito bed nets improves their uptake. Whether such studies will ever aggregate upwards into an understanding of development is highly questionable. By contrast, Acemoglu and Robinson have resolutely focused on only the largest of macro questions: how contemporary institutions were shaped by colonial ones, why it was that regions of the world that were the richest in the year 1500 were among the world’s poorest today, or how rich elites were ever persuaded to redistribute their wealth. In Why Nations Fail, Acemoglu and Robinson restate and enlarge upon earlier articles like “The Colonial Origin of Institutions” and “Reversal of Fortune,” but in contrast to their academic work, the new book has no regressions or game theory and is written in accessible English for general readers.

Acemoglu and Robinson (henceforth AR; Simon Johnson of the old AJR team dropped out of this volume) have two related insights: that institutions matter for economic growth, and that institutions are what they are because the political actors in any given society have an interest in keeping them that way. These may seem like obvious statements, but many people in the development business haven’t gotten the message. Among development specialists there is what AR term the “ignorance” hypothesis: failure to develop is the result of not knowing either what good policies are (this was the old Washington Consensus) or, now that the focus has shifted to institutions, what good institutions are or how to create them. Many development agencies act as if leaders in developing countries want to do the right thing, if only they knew how, and that development assistance should therefore consist of sending smart people from places like Washington out to teach them, perhaps accompanied by some structural adjustment arm-twisting.

By contrast AR argue that bad institutions are the product of political systems that create private gains for elites in developing countries, even if by doing so they impoverish the broader society. (Think Nigeria, which has many multimillionaires while 70 percent of the population lives below the poverty line.) Doing the “right thing” would take away the rents they receive, which is why no amount of hectoring or threats to withhold the next loan tranche has much effect on their behavior. They are making almost the identical point to the one made in the 2009 book Violence and Social Orders by Douglass North, John Wallis, and Barry Weingast (NWW), who argue that most underdeveloped societies are what they term “limited access orders” in which a rent-seeking coalition limits access to both the political and economic system. Indeed, I see no real difference between the “extractive/inclusive” distinction in AR and the “limited/open” access distinction in NWW.

This conclusion about the primacy of institutions and politics for development has important implications for policy as AR point out. If growth is a byproduct not just of good policies like trade liberalization, which can in theory be turned on like a light switch, but rather of basic institutions, then the prospects of foreign aid look dim. Bad governments can waste huge amounts of well-intentioned outside resources; indeed, the flow of aid dollars into poor countries can undermine governance by undercutting accountability, thereby leaving societies worse off than they would otherwise be. As the American nation-building efforts in Afghanistan and Iraq have indicated, moreover, foreign efforts to help construct basic institutions are an uphill struggle. Bad institutions exist because it is in the interests of powerful political forces within the poor country itself to keep things this way. Hamid Karzai understands perfectly well how clean government is supposed to work; it’s just that he has no interest in seeing that happen in Afghanistan. Unless the outsiders can figure out a way to change this political calculus, aid is largely useless.

So far, so good. AR have done a great deal over the years to focus the attention of both theorists and policymakers on institutions, and to shape the emerging consensus on the importance of politics to growth within the economics profession. It is, then, very disappointing that their more fully fleshed out book fails to go very much further than these broad conclusions, skirting critical issues of exactly what sort of institutions are necessary to promote growth, and failing to come to grips with some critical historical facts.

The first problem with their analysis is conceptual. They present a sharply bifurcated distinction between what they call good “inclusive” economic and political institutions, which are sometimes also labeled “pluralistic,” in contrast to what they call bad “extractive” or “absolutist” ones. Unfortunately, these terms are way too broad, so broad indeed that AR never provide a clear definition of everything they encompass, or how they map onto concepts already in use. “Inclusive” economic institutions, for example, seem to include formal property rights and court systems, but also have to do with social conditions that allow individuals access to the market such as education and local custom. “Inclusive” political institutions would seem to imply modern electoral democracy, but they also include an impersonal centralized state as well as access to legal institutions, and forms of political participation that fall well short of modern democracy. We find, for example, that England following the Glorious Revolution of 1688-89 was incipiently inclusive, despite the fact that well under ten percent of the population had a right to vote. When AR first used the term “extractive” in their early articles, it referred to truly extractive practices like the mines of Potosí or the sugar plantations of the Caribbean which extracted commodities out of the labor of slaves. In the current book extractive seems to mean any institution that denies any degree of participation to citizens, from tribal communities to ranchers in 19th century Argentina to the contemporary Chinese Communist Party.

Since each of these broad terms (inclusive/extractive, absolutist/pluralistic) encompasses so many possible meanings, it is very hard to come up with a clear metric of either. It also makes it hard to falsify any of their historical claims. Since more real-world societies are some combination of extractive and inclusive institutions, any given degree of growth (or its absence) can then be attributed either to inclusive or extractive qualities ex post.

The use of such broad categories and the failure to distinguish between the different components of political “inclusion” greatly diminish the book’s usefulness, because one wants to know how these components individually affect growth, and how they interact with one another. There is for example a large literature comparing the separate impacts of a modern state, rule of law, and democracy on growth, which tends to show that the first two of these factors have a far greater influence on outcomes than democracy. There is in fact a lot of reason to think that expansion of the franchise in a very poor country may actually hurt state performance because it opens the way to clientelism and various forms of corruption. The Indian political system is so inclusive that it can’t begin major infrastructure projects because of all the lawsuits and democratic protest, especially when compared to the extractive Chinese one. Furthermore, as Samuel Huntington pointed out many years ago, expanded political participation may destabilize societies (and thereby hurt growth) if there is a failure of political institutions to develop in tandem. All of the good things in the “inclusive” basket, in other words, don’t necessarily go together, and in some cases may be at odds. You never get much hint of this in Why Nations Fail, however, since the authors seem to argue the more inclusion the better, along any of its axes.

Like many other works making use of history but written by economists, the AR volume contains some pretty problematic facts and interpretations. It makes the case, for example, that Rome shifted away from an inclusive Republic towards absolutist Empire, and that this was then responsible for Rome’s subsequent economic decline. Leave aside the fact that Rome’s power and wealth continued to increase in the two centuries after Augustus, and that its eastern wing managed to hold on remarkably until the fifteenth century. It can be argued that the shift from the narrow oligarchy of the Republic to a monarchy with highly developed legal institutions actually increased access to the political system on the part of ordinary Roman citizens, while solving the acute problem of political instability that bedeviled the late Republic.

Similarly, following on a tradition begun by Douglass North and Barry Weingast, AR point to the Glorious Revolution of 1688/89 as a critical juncture marking both the establishment of secure property rights and an “inclusive” political system. The latter point is fair enough, but English property rights were rooted in a much older tradition of common law dating from the Norman invasion, and had created a strong commercial civilization well before 1689. The Glorious Revolution was much less important in establishing the credibility of property rights per se, than of the Crown as a borrower, which explains why English public debt exploded in the century following that event.

Given their overall framework, the hardest thing for AR to explain is contemporary China. China today according to them is more inclusive than Maoist China, but still far from the standard of inclusion set by the US and Europe, and yet has been the fastest growing large country over the past three decades. The Chinese restrict access to the market, engage in financial repression, fail to secure property rights, have no Western-style rule of law, and are ruled by a non-transparent oligarchy called the Communist Party. How to explain their economic success? Rather than see this as a threat to their model (i.e., more inclusion, more growth) AR pull a slight of hand by arguing that Chinese growth won’t last and that their system will eventually come crashing down (like Rome did, after about 200 years?). I actually agree that China will eventually crash. But even if that happens, a theory of development that can’t really explain the most remarkable growth story of our time is not, it seems to me, much of a theory.

The broad conclusions of Why Nations Fail are, thus, incontrovertible and of great importance to policy (which is why, incidentally, I gave it a positive blurb). One only wishes then that the authors had made better use of basic categories long in play in other parts of the social sciences (state, rule of law, patrimonialism, clientelism, democracy, and the like) instead of inventing neologisms that obscure more than they reveal.

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  • PR

    This is by far the best review on AR’s book so far.

    • JCE

      I agree!

  • Jez Weston

    “Nigeria, which has over 100 billionaires” – You might want to check that. There’s a grand total of probably one billionaire in Nigeria, Aliko Dangote.

    • RP

      When did this review say that Nigeria has over 100 billionaires? I thought he said Nigeria has “many multimillionaires” (which is true) and not 100 billionaires.

      • Jez Weston

        The original version of the article was edited without the edit being acknowledged.

        That kind of lack of fact-checking is pretty sloppy.

        • Kaganovich

          1 dollar being 157 Nigerian Naira might increase the amount of local billionaires to 100.

  • Maduka

    Jez,

    I can assure there are a lot more than 10 Nigerian dollar billionaires. How do I know? I am Nigerian

  • http://www.mypostingcareer.com Dystopedon

    Why commentators fail: The letters “IQ” are not found on this page.

    • I.E.

      This explains why China is rich.

      • HM

        And why China was poor until 30 years ago as well?

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  • http://www.gabrielrega.com Gabriel Rega

    Still haven’t read the book, but maybe they could explain China in terms of levels? The maoist institutions condemned China to a low income but the reforms opened the possibility of reaching a higher income level that has not yet been reached but is smaller than American levels (per capita)? Kind of Solow model.

    • Dennis

      This is one of the arguments presented in Capitalism with Chinese Characteristics.

  • Marko

    I haven’t read the book yet , but I think the argument that China disproves the thesis is probably specious. Think of the title as “Why Nations Fail to Continue Succeeding”.

    China has reached a point in development that many countries may reach , using a variety of development models , some of which will be relatively institution-free. It’s taking the next step that requires the institutional foundations. This recent graph by Fatas and Mihov illustrates the point:

    http://2.bp.blogspot.com/-679US1BYU-g/T27WhTs0wzI/AAAAAAAAAUA/rGBsRsT78gE/s1600/Screen+Shot+2012-03-25+at+10.25.26+AM.png

    Their blog post discussing it is here :

    http://fatasmihov.blogspot.com/2012/03/great-wall-and-chinese-reforms.html

  • http://www.isteve.blogspot Steve Sailer

    Excellent review. AR are extraordinarily dogmatic and reductionist. I often caution people not to accept Jared Diamond’s Guns, Germs, and Steel as the final word on why some places prosper and why others don’t, but I want to tell AR that they need to take Diamond’s emphasis on geography seriously: some places are more blessed by geography than others.

    • Sredni Vashtar

      Acemoglu and Robinson clearly have no problem taking germs into account. Come on, read “The Colonial Origins of Comparative Development”, or at least the abstract.

  • Kaganovich

    Acemoglu should stick to his irrelevant mathematical modeling and leave historical political analysis to those with broad historical knowledge and an awareness of the depth and ambiguity of human institutions.

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  • karen

    does anyone know why some states develop inclusive institutions while others develop extractive ones? more specifically, what causes groups will all the political power (operating within extractive institutions) to give up their power and embrace inclusive instituions?

    • Daniel M. Ryan

      I don’t think anyone does, and therein lies the trouble. Without such research, we’re tempted towards fancies about a ruling class slipping something over the heads of the people, and how revolution is The Answer.

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  • Sue

    People can’t explain China’s success because they can’t just look at facts and leave their ideology outside the door. How China is succeeded is simple to me:
    1. They set a goal of economic development and pursue it single-mindedly.
    2. Absolute political stability.
    3. Learn from everyone including its own mistakes, disregarding ideology. And learn all the time.
    4. Experiment on a small scale before nationwide implementation.
    5. Allow mistakes but be flexible and correct them quickly.

    • tundrup

      Absolute political stability and all its hidden consequences will be the reason for their downfall.

    • windy

      I couldn’t agree you more

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  • Anthony

    Fukuyama contends “Why Nations Fail” has policy importance and some relevant insights; moreover, he believes authors’ argument about primacy of institutions and politics vis-a-vis development foretells impacting policy implications. Yet, he finds categorical short comings in authors’ interpretation – state, rule of law, etc. remain paramount in any governance analysis for F.F.

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  • MaryWilbur

    I’m reading the book. AR do not claim that extractive economies cannot grow. They do claim that they will eventually cease to grow.

  • Jan

    Fine review. Perhaps AR stumble so badly because they have spent too much time on formalities, and too little on the content of history.

  • http://www.sneps.net Eric Kaufmann

    I think Fukuyama is largely correct – it is important that policymakers understand that institutions must be right before durable economic growth can take place. However, to be fair to AR, they argue that China (whose GDP per head is still only a fraction of the West’s) resembles the USSR in having fast, state-led growth during early modernization. I accept their claim. Where AR fail is in their neglect of culture. The idea that Australia, Canada and the US are not Peru mainly because they had few natives and plenty of space for people to outrun their extractive overlords is patently ridiculous. Yes, the Southern US was relatively poor because of slavery. Still, the role of an English liberal tradition was paramount in explaining the success of Anglo-Saxon settler societies. See my review in the Literary Review: http://www.literaryreview.co.uk/kaufmann_04_12.php

    • Jan

      Hi Eric,

      I would like to read your review. However, the link does not work, can you supply another? Thank you. Jan

  • http://janwareus.blogspot.com Jan Wareus

    You actually agree that China will eventually crash, you say.
    I don’t understand you. China today is more inclusive than Mao’s China,I understand. Why shouldn’t it be even more “inclusive” in the future? Why must it “crash”? Future is depending on strong leadership or do you think that less growth can be voted for?

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  • victoria wilson

    “: that institutions matter for economic growth, and that institutions are what they are because the political actors in any given society have an interest in keeping them that way.”

    Every “p” in “public institutions” should have a subscript as the political actors – whether a few or the entire society – define the public that the institution serves. It’s not whether the institutions are bad or good. This is relative. If the elites choose to use public resources to enrich the elites, I’m sure they feel this is good. Most probably the greater p (or more inclusive) objects to the narrow elite public group’s actions. I’m also sure some form of repression is in play to preserve the arrangement.

    The subscript for p in public infrastructure in India may include the entire population, which is certainly the goal in a democracy. In this case the public appears to not trust the institution that provides the infrastructure. Fear of not getting a fair shake will bring many transactions to a halt.

    A country’s geographic delineation may organize people into nationalities, but it does not guarantee the populace the services of even the most basic (and original) social contract: public safety.

  • Bruce Taylor

    Interesting that Fukuyama doesn’t mention role of ideology in his critique of AR. Churchill ‘s quip about people needing excuses for what they do can apply: need to self justify actions in some way even tho you operate at a lower level of maturity, e.g. Peoples Democratic Republic. Decline of slavery in Brits Empire was in part a realization that racial inferiority was an untenable idea a la Wilberforce and this became a weapon in the anti slavery legislation in the 1830s. China’s reform path came after the crisis in belief following the Mao disasters which in turn may set china on a drift to more inclusive political behavior.

  • cheryl benard

    I think we are on the right track when we start recognizing that the societies we are trying to “develop” are not necessarily governed by inept people who don’t know how to establish modern institutions, but by elites with their own set of interests and agendas. What is still missing in the analysis is the recognition that these systems “work” for the rest of their society too – although admittedly, not very well. Still, complicated networks of obligation and affiliation plus religious and ideological belief sets make things work or at least make things endure. None of that can easily be changed from the outside. If we only focus on institutions we will miss the boat again. We would also need to untangle the values and affiliations…

  • Oscar

    It seems to me, from reading the review and comments, that the authors have missed an awesome opportunity to expose the clientelism and corruption in which international financial institutions find themselves in their pas de deux with corrupt governments in the third world, a major cause of the growing indebteness and poverty playing “participatory” democracies that are not democratic at all in the distribution of wealth and the perceieved benefits of growing indebtness for developmental purposes…

  • victoria wilson

    The last two comments bring up several interesting points. First off, how do public institutions and the wide variety of associational life activities that are present in every society interact with each other? How do these activities contribute to the wealth or detriment to their participants? Is there a systematic interplay that repeats itself and could be used to predict outcomes? We don’t have to go half way around the world and attempt to peer into the intricacies of another society to figure this out. Right here in the US we also have “complicated networks of obligation and affiliation plus religious and ideological belief sets.”

    Assuming such a system comes to light, it could be handy for American politicians as well. The days of divining what is ‘good’ for the country while special interest groups whisper in their ears and false promises fall from their lips seem to be (thankfully) over.

    The second point about clientelism and corruption is a judgment call that can be made from the US, as a party to the contract. I see the motivation for funding as a response to an inalienable human desire to help the most vulnerable. If the agreement is to provide funds, through international banking, to aid the extreme poor in a foreign land, and these funds go into the pockets of the wealthy, then we are simply being duped. Continuing such action, in my mind, casts shadows of doubt on all those who participate.

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  • Daniel M. Ryan

    As for the mention of game theory, I’d like to present a short critique of classical game theory in the form of a poke at John F. Nash himself. [They didn't know about his schizophrenia.]

    It’s the song “Ice Cream Phoenix” by Jefferson Airplane.

    http://www.youtube.com/watch?v=ocmBA1OEn2o

    Lyrics:

    You don’t know just
    when to stop and when to go
    City streets in the dead of winter
    stop your mind with dirty snow
    Walk at night and touch your hand to
    the golden lights and let them show
    You the shadows disappearing
    I’ll smile and say I told you so

    Baby – tell me why if you think you know why
    people love when there’s no tomorrow

    And still not cry when it’s time to go
    And still not cry when it’s time to go
    And still not cry when it’s time to go

    The wall of your memory will echo your sorrow
    The pictures of sadness are not what they seem
    So hold out your smile take my hand and be happy
    These pictures of sadness are not all they seem
    Are you so old that you’ve no childhood
    Is your time line so unreal
    That all your sunsets come in the morning?
    Baby tell me how do you feel?

    Shelves of books in your mirror reflecting
    The sidewalks & alleys that you’ve seen
    Show colors change as the images fade in
    My magical vanishing memory machine

    Baby – Tell me how if you think you know how
    People love if there’s no tomorrow
    Do people love if there’s no tomorrow

    And still not cry when they have to go
    And still not cry when they have to go
    And still not cry when they have to go

    ———–

    Amazing what you can find if you dig off the beaten path…

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  • http://thepencilofnature.net Lorenz Gude

    Having watched Zimbabwe destroy itself – fail is too mild a word – i certainly recognize many of the problems alluded to in the article and comments. If I can add anything I would say that we underestimate the role of partially conscious institutions or structures we call culture. Understanding Mugabe as an incompetent Marxist, or a venal self centered dictator only explains so much. But reading about African absolute monarchs like Chaka Zulu begins to explain how such a tragedy can occur. Although I have no direct experience of China I have known since studying Chinese History in the sixties that it was risky to discount the importance of Confucian thought long before there was any prosperity in China that needed explaining. For example a friend told me that there are signs in China that say ‘Spitting is a social crime’. So too evidently is murdering one’s money launderer, while in the US not even bringing down the world economy is classed as a social crime.

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  • rodders

    There will always be debate about economists taking on other matters and after reading some of the reviews here is a link to add to the debate. http://www.economist.com/blogs/buttonwood/2012/04/duelling-academics
    I personally will read the book before i make up my mind unlike some people here.

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  • Jesse

    This one seems to focus on politics as the driving factor. Although that may be the case, even when it’s a democracy like it is in many african countries, there’s still backwardness regardless. At the end it all comes down to the economic policies in place. If you have no economy, you have no government, ex somalia. Politics is just a smokescreen in a broad sense. If i have control over a country’s economy then i have the ultimate power, not the muppets in government offices. If i had the power to countrol all of africa’s economy and finances, the whole continent will be fully developed in 15 years.

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  • MarkMad

    “state, rule of law, patrimonialism, clientelism, democracy, and the like”

    Civil institutions and state capital is a must for any health democracy. But unfortunately our capitalist government refuses to be in business and therefore has no source of income but taxes.

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  • Colm

    Good review.

    I’m part way through this book, and while I will reserve judgement until I’ve finished it, I was struck, as this reviewer was, by the rather superficial treatment of Rome. I feel we have a temptation to feel rather self-important when looking back on “failed” states and somewhat pretentiously purporting to “explain” them with reference to contemporary economic notions. Its worth having a little humility in the face of societies that endured for centuries.

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  • yw

    I’m a college student in china,many of my friends care about this country.AS far as i can see, no one knows china well until you live in it.

  • Felipe P. Manteiga

    “Bad institutions exist because it is in the interests of powerful political forces within the poor country itself to keep things this way.”

    Doesn’t the social pressure from changing institutions and their major drivers (e.g. demography and migration, climate, knowledge, technology, ethics, communications and information) reach a tipping point unleashing major changes?

    Those who anticipating coming changes thrive (e.g. President Obama, Bill Gates, Steve Jobs, Karl Rowe, mega-urban and non-individualized transportation solutions and quickly adaptable groups springing all over) while those bound to the past lose out (e.g., Labor Unions, conventional churches, the Communist Party, brick and mortar banking, U.S. Congress, patents, and inflexible bureaucracies across the planet)

    Mancur Oleson (MO), a keen economist with the mind of a sophisticated historian and philosopher, brought powerful insights into the decline of nations. To wit, when those elites who gained control over resources and political capital surfing and shaping past institutions cling on to power “the old fashion way” –yesterday’s leading lights become pits of darkness. Like black holes they absorb societies’ energy.

    Beyond’s Schumpeter (or Marx, Ricardo, Malthus, and other classical prophets of gloom and doom, the balck holes were bypassed by waves of technological prowess crashing continuously, in massive tsunamis or discreet wavelets, on the shores of modern industrial societies. But what happens when patent laws and access to capital and markets are controlled up-stream and neither spillovers (a la Monsanto) or spill ins (a la Green Revolution) are allowed?

    When institutions and their dynamics become obsolete, entrenched elites block their replacement by ones better attuned to existing and unfolding demographics, technologies, climate, and relative power influencing relationships (e.g. neo-medieval power hierarchies in Latin America).

    Nations decline when yesteryears hold present and future hostage–in MO words, “motivation by personal gain” pulls back progress. Other nations (or groups, organizations, corporations, alliances) without such straight jacket, thrive and replace them.

    In the U.S., the Cuban blockade, the sugar policy, redistricting, the Great Compromise, and the Pentagon’s commitment to benefit major corporations built(or that had their capital accumulation base began) during the last wars (so called fighting the last war ex-ante–or funding the last contract ex-ante) illustrate this worrisome tendency.

    Let’s hope the ratio of forward looking leaders and groups overpower those locked to our glorious, but gone, past. Where will the principal agents be found? Hopefully, away from Portuguese saudade or Camoes’Os Luisiadas.

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