Abstract
As the subtitle indicates, this book discusses the “the origins of power, prosperity, and poverty.” Here the authors argue that countries vary in their levels of economic success because they have devised or adopted qualitatively different rules, incentives, and institutions. Some countries, like South Korea and the United States, have fashioned inclusive institutions that encourage wide participation in society and make efficient use of the talent and skills of its citizens. Such institutions include secure property rights, an unbiased system of law, transparent elections of public officials, and the provision of public services. Inclusive regimes encourage and reward individual success, and national success largely follows individual success. Other countries, like North Korea and much of Latin America, suffer from extractive institutions that prevent widespread participation and discourage productive enterprise. Property rights can be precarious, governments often are not chosen at the ballot box, and public services can be absent or at best poorly maintained. Here individual success largely involves one small “oligarchic” group in society appropriating the income and wealth from another larger group.
The field of economic development has risen to prominence after the Second World War, and the most enduring contributions to development theory have typically involved a simple perspective or thesis. Arthur Lewis associated dualism with modernization; Walter Rostow recognized barriers to the take-off; Gunnar Myrdal saw circular and cumulative impediments to a just society; Douglass North highlighted the key role of property rights; Mancur Olson uncovered contradictions to collective action; and Jeffrey Sachs has reclaimed geography’s role in development. The book by Daron Acemoglu, an economist, and James Robinson, a political scientist, clearly follows in this big-idea tradition. Assembling a massive amount of historical evidence—drawing from the Roman Empire, the Mayan city-states, medieval Venice, and a litany of more contemporary case studies—the authors propose a general “theory” of political economy. This theory has two parts. At one level is the fundamental distinction drawn between inclusive and extractive institutions. At another level is an “explanation” for why inclusive institutions have appeared in some parts of the world but not in others. As the authors have received glowing endorsements from prominent economists and historians alike, their message is certainly worthy of our attention.
Why Nations Fail never claims that extractive institutions are entirely inconsistent with economic growth. In fact, the elites that control extractive regimes are motivated to encourage growth as much as possible in order to maximize their rents. But this growth cannot be sustained for two broad reasons. First, growth over the very long-run requires organizational and technological innovation where such “innovation cannot be decoupled from creative destruction” (p. 430). Widespread creative destruction not only replaces old (physical, human, and social) capital with new capital but also destabilizes the established power relations in society. Unfortunately, under durable extractive regimes, competing interest groups are left with no means for peacefully transferring power, which, in turn, leads to crises and further political instability. In fact, the fear of elites losing their power, and the consequences of this for economic policy, remains one of the most intriguing ideas of this book. It is also worth stressing that the authors visualize that synergies grow between the separate levels of economic and political institutions in each nation, where extractive institutions lead to vicious circles and inclusive institutions lead to virtuous circles across those two levels.
The other important idea they advance is the appearance of crucial junctures or key turning points in the histories of individual nations. This might be a single event like the arrival of Commodore Perry’s ships in Edo Bay or a series of events such as those that took place in Europe during the Napoleonic aggression. These special circumstances provide opportunities for nations to basically reinvent themselves by replacing extractive institutions with inclusive ones. But this transformation will never be immediate, and in each case an element of contingency is always involved. Given somewhat different initial conditions (in culture, resources, etc.) and somewhat different patterns of institutional drift, two countries starting at the same level of well-being might exhibit a significant developmental gap after only a few generations. Here Acemoglu and Robinson adopt the popular notion of natural experiments to highlight both the nature and the implications of this institutional drift.
The main text is meant to be enjoyed by a wide audience. The writing is lively and engaging and the discussion is largely free of both references and jargon. Moreover, at the end of the volume, each of the 15 chapters is given a short biographical essay that includes the most appropriate sources. Academics might not like this separation because it distances the contributions of others from those of the authors, especially when topics such as underdevelopment, diseases, and property rights are addressed. The discussion is sprinkled with many useful maps and there are numerous photographs in the hardcover edition.
Nevertheless there are some surprising—if not troubling—omissions. Very little is said about the role of cities in development, especially when some scholars have made a distinction between “generative” and “parasitic” cities. Peter Hall (1998), among others, has made a strong case for the indispensable role of cities in marrying together the endeavors of art, science, and technology. The authors also say very little about demography. Thus, readers get few insights into the roles of migration, the population transition, and the demographic dividend in national development. In fact, institutional perspectives are emphasized at the expense of individual perspectives. As a result, the valuable insights provided by Amartya Sen (1999) on human capabilities are not even acknowledged. Finally, the book is somewhat vague on what is actually meant by prosperity or economic success. The authors do show a map indicating national levels of GDP per capita in 2008 but this seems to be a very narrow choice. Most global agencies now prefer measures of development that either address resource inequality or recognize health, education, and political participation as other important dimensions of human development.
In summary, while this book covers a lot of material, it is not designed to be a textbook. If it were adopted for a development seminar, the various insights and arguments would doubtless incite much lively and interesting debate, but students would have to acquire other reading materials in order to get a full and balanced perspective on national development issues.