Why Nations Fail, by Professors Daron Acemoglu and James Robinson has deservedly gained right of entry to the pantheon of Big Books on economic development.
Like the pantheon’s other occupants, most recently—Jared Diamond’s Guns, Germs and Steel, and Ian Morris’s Why the West Rules for Now, Acemoglu and Robinson’s work tackles one of the biggest questions facing humanity: why some countries are rich and others poor. The book is daringly ambitious in the parsimony of its answer. Its scholarship is serious even as it avoids the modern bane of narrow erudition. Above all, it offers a deep and plausible insight about development.
Guns, Germs and Steel was dazzlingly pioneering. Why the West Rules for Now had the additional virtue of its heavy subject matter being leavened by light and fluid prose, thanks to frequent appearances by Asimov, Kipling, Dickens, and the like. And Why Nations Fail does not draw upon as breathtakingly broad a range of disciplines as those in either Diamond’s or Morris’s work. This stems from the different time scales of inquiry. Diamond starts the development clock around 13,000 BCE, and Morris more than a million years ago. But the Acemoglu and Robinson story begins “only” about 700-800 years ago, necessarily ruling out from their account evidence from genetics, evolution, paleo-biology, and archaeology, which are staples in both Diamond and Morris.
Why Nations Fail is both a derivative and a development of an academic paper that Acemoglu and Robinson co-authored in 2000 with MIT Professor Simon Johnson (full disclosure: Professor Johnson is my colleague and co-author). In The Colonial Origins of Comparative Development, one of the most-widely cited and justly influential academic papers on economic development in the past fifteen years, the trio argued that the quality of economic institutions was the key long-term determinant of economic prosperity (measured broadly in terms of per capita GDP). Good economic institutions protected property rights and guaranteed the sanctity of contracts, which are key prerequisites for private sector investment and entrepreneurship.
In Why Nations Fail, however, Acemoglu and Robinson go one step further in arguing that economic institutions in turn are determined by politics. The more concentrated political power is, the more a small group in society tries to extract wealth for itself to the detriment of the rest: this is a world of “extractive” institutions. Conversely, dispersed political power as exists in democracies is conducive to contestability and competition, which create the conditions for broadly shared prosperity (a world of “inclusive” institutions). Thus, Acemoglu and Robinson’s parsimonious explanation for the disparities in wealth across the world is: political institutions.
There have been many insightful reviews and critiques of the book by Frank Fukuyama, Jared Diamond, Martin Wolf and the Economist, as well as thoughtful responses from these authors on their respective blogs. My aim is not so much to review all aspects of the book as to offer one perspective on it.
Invoking the very spirit of Occam’s Razor that imbues the book, I would like to explain Why Nations Fail in light of the figure below: economic development (proxied by per capita GDP) is measured on a y-axis and that an index of political institutions (higher values denote more representative or inclusive ones) on the x-axis. The choice of axes is very important because WNF asserts that causation runs from politics (the independent variable on the x-axis) to economic development (the dependent variable on the y-axis). The authors are unsympathetic to causation running the other way. That is, they reject the modernization hypothesis, which asserts that improvements in standards of living will lead to more democratic politics, stemming for example, from increased demand for political freedom and participation. For Acemoglu and Robinson, political institutions bear the deep imprints of history, and although they are not immutable, their susceptibility to change induced by economic development is limited.
Figure: “Why Nations Fail” in a single picture
This chart is based on a sample of 141 countries (excluding the major oil exporters). Data are for 2009. GDP per capita data are from the Penn World Tables (version 7), and data for the democracy index are from the Polity IV database.
The upward-sloping line in our figure reflects a strong relationship (on average) between political institutions and economic development, validating the central argument of Why Nations Fail. However, China and India stand as outliers (they are far away from the line drawn by Acemoglu and Robinson’s “function”). And the interesting thing is that each of these countries is an exception to, or even a challenge to, their thesis in opposite ways. India (which is way below the line) is too economically underdeveloped given the quality of its political institutions, and China (which is well above the line) is too rich given its lack of democratic institutions.
Acemoglu and Robinson can mount two defenses. First, they can contend that all countries should be treated equally because every political unit is only one experiment, and thus one data point (regardless of size). After all, their thesis holds true for a vast majority of countries (that is why the line is upward sloping). Therefore the authors must be allowed some exceptions, given they have daringly embraced a mono-causal explanation of what is clearly a complex relationship between politics and economics. Still, at a basic level, explaining economic development while leaving out one-third of humanity from it is not entirely satisfying.
Second, Acemoglu and Robinson can contend that theirs is a claim about the medium to long run. These horizons are never clearly specified but would rule out criticisms based on relationships observed for only, say, twenty to thirty years. Reproducing the figure for 1980, for example, would show China near the line (although India would still be far from it). The Chinese anomaly is a result of the past thirty years of astonishingly rapid growth. Wait for another twenty years, Acemoglu and Robinson might plead, and the anomalies in the figure will fade away or at least move in the direction predicted in their book.
This defense is more problematic. Suppose that we were to re-visit the book in 2030. What would have to happen to China and India for them to be consistent with the relationship predicted by Acemoglu and Robinson? India in twenty years would have to slide into authoritarian chaos and become the equivalent of countries such as Venezuela today politically, or it would have to boom to become the equivalent of countries such as China in terms of standards of living. Conversely, China would either have to become a near-Jeffersonian democracy or suffer a dramatic collapse in output (that is, post negative growth). None of these four outcomes is impossible, but none is likely either. Thus, even twenty years from now, China and India are unlikely to be adequately explained by Acemoglu and Robinson’s thesis.
But one could make an even stronger critique of the book. Even if China and India were to move rapidly in the direction predicted over the next twenty years, it would still beg the question of how China managed to sustain thirty to fifty years of historically unprecedented rapid growth (and poverty reduction) under repressive political conditions and how India squandered thirty or forty years of democracy with its Hindu rate of growth. Of course, there are answers but the point is that they would have to be different from, and even orthogonal to, the central thesis of Why Nations Fail.
In other words, the inability of Acemoglu and Robinson to explain the development trajectories of these two large countries is a fault not of their rich and excellent book but of the sui generis, uncooperative reality of Chinese and Indian history.