Why Nations Fail

I have just read Why Nations Fail by Daron Acemogulu and James Robinson. The authors are looking for a grand idea.

We need a theory of why some nations are prosperous while other fail and are poor. The theory needs to delineate both the facts that create and retard prosperity and their historical origins.

They select institutions as the decisive bit idea. They divide nations according to whether their institutions are extractive or inclusive.

Our theory has attempted to achieve this by operating on two levels. The first is the distinction between extractive and inclusive economic and political institutions. The second is our explanation for why inclusive institution emerged in some part of the world and not in others. While the first level of our theory is about an institutional interpretation of history, the second level is about how history shaped institutional trajectories of nations.

Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic grow than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. Inclusive economic institutions are in turn supported by, and support inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralisation so as to establish law and order, the foundations of secure property right, and inclusive market economy. Similarly extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use resources they obtain to cement their hold on power

The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, one in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive economic and political institutions.

Aemogulu and Robinson cover broad swathes of history and discuss many nations to support their theory.

The institutional approach has real merit. Sound institutions are really important, so the book is really worth reading. However, one explanation is never enough. There are counter examples that do not really fit with their theory.

One example is China. The growth in the Chinese economy over the last two decades has been amazing. Several hundred million people have gone from poverty to prosperity in a very short time. Nothing like it has occurred in the world before. However, China has corrupt institutions and the rule of law is absent. The institutional theory does not explain the rapid economic grow in China.

New Zealand is another example that does not fit the theory very well. The country has a very well established legal system, and international surveys suggest it is one the best place in the world to do business, yet economic growth here has been sluggish.

At the beginning of the book, Aemogulu and Robinson discount two alternative theories that have been put forward.

Geography is the first theory that is discarded. Despite their arguments, geography does seem to be an important factor. Britain had plenty of accessible coal and iron ore, and was favourably situated for the trade winds from America. The United States has abundant mineral resources and a huge navigable river system going through the middle of the continent. These factors contributed to economic development. For New Zealand, thousands of miles from the next large market are a disadvantage. Geography is important, even if it is not the decisive factor.

They also reject culture as a determinant of economic development. Probably too quickly. A Confucian culture has a strong influence in China. It is one reason for the strong economic growth, despite the lack of stable institutions.

I believe that Christianity is an important factor for economic development too.
Christian faith produces honesty, trust, confidence in the future, thrift and service, which are all important for economic development. The distorted gospel that has been preached in Africa is an obstacle to development there.

In practice, this means that there is not one factor that can explain all economic development. A combination of factors is needed for long-term economic development to emerge. Institutions are important, but other factors may be important as well.