Wednesday, 26 March 2014

Why Nations Fail

The intellectuals I admire the most are those whose horizons are the widest. Peter Watson is one such intellectual because of his book Ideas from Fire to Freud which majestically surveys all the major ideas from neolithic times to the present day. Another of my icons is Jared Diamond on account of Guns, Germs and Steel, a book that offers a number of very original ideas to explain why some parts of the world have been more prosperous over the ages since farming replaced hunter-gathering.

Now I have met two more giants: Daron Acemoglu and James Robinson. They are the authors of Why Nations Fail which was published in 2012; I have only just read it but, better late than never, it was breath-taking in its explanatory power.

The topic of the book is captured in the title: it explains why some nations are less successful than others and indeed why some fail altogether.  The one sentence explanation is that failing states have political and economic institutions that allow an elite minority to dominate the remaining citizenry.  This simple idea is developed in great detail.  The authors make a distinction between extractive institutions (bad) and inclusive institutions (good).  At the political level this distinction is between systems that allow all citizens equality of voting rights and equality before the law and systems that don't.  At the economic level the distinction is between systems that allow elites to amass great wealth at the expense of the others (by giving them monopolies or exclusive access to natural resources for example) and systems that protect the financial resources of everyone (by enforcing property rights for example).

The remarkable aspect of the book is how much evidence the authors bring to justify their hypotheses.  They give detailed analyses of dozens of countries at various points on the inclusive-extractive spectrum which convincingly demonstrate the validity of their ideas.  In most cases these examples trace the historical causes of a country's institutional practices and this perspective is a brilliant look at history through a particular lens.

I'll give two contrasting summary examples: the countries of South America compared with the USA and Canada.  When the Spanish conquistadors arrived in South America they found a land rich in both material and human resources.  In several brutal centuries they enslaved the population in order to loot the gold and other precious materials for the Spanish crown.  Obviously this was a very extractive system.  But it remained extractive when the various South American countries gained their independence since the new rulers took over the institutional practices set up by the Spanish.

In contrast something rather different unfolded when North America was colonized (although the authors are clear to point out that this was in no way due to any more noble motives of the colonizers). Things were rather different for several reasons. One reason was that the British were already moving towards a more inclusive system in their own country (because of the monarchy losing much of its power in the Civil War and the resulting Glorious Revolution of 1688).  Another reason was that North America was not rich in precious metals. Instead tobacco was the cash cow but tobacco required intensive farming and, there being insufficient or unwilling natives to enslave, the colonists had to furnish the labour themselves. This gave them economic leverage with the British government and, of course, the War of Independence allowed the Americans to set up a relatively inclusive state apparatus.

Why some countries followed a historical path towards inclusive institutions while others didn't cannot be explained by some simple mechanism. The authors refer to "critical junctures" which set countries travelling along particular trajectories. Often it seems to be accidental what happens on these occasions. For example, a plausible consequence of the 1688 invitation to William of Orange might have been that the Stuart Royalists might have won the day and firmly entrenched James II back on the throne to roll back the reforms following the Civil War. Or, a century earlier, bad weather might not have sunk the Spanish Armada and Philip II might have established a Catholic stranglehold on England.

The book explains why, once a direction has been set, either to an extractive state or an inclusive state, vicious or virtuous circles tend to preserve that direction. This is certainly seen today among the former colonies of Great Britain where often the extractive apparatus they established has been inherited by the new rulers after independence who have found it comfortable to enjoy getting rich just as their former British overlords did.

I ended the book reflecting on two things. The first was a comparison with Guns, Germs and Steel which is another attempt to explain why different countries nowadays enjoy very different levels of prosperity. Diamond's explanations are rather different (and, intriguing though they are, are more speculative) but they reach back much further to the time before nation states developed. Acemoglu and Robinson believe that their institutional explanations would apply to these much earlier societies. Here they are on weaker ground because there is less evidence in the historical record. I find many of Diamond's explanations plausible about why agriculture took off more quickly in some parts of the world than others but we shall probably never know with certainty.

The other thought I was left with is that, despite the tendency of inclusive systems to be self-correcting, we cannot be complacent. I look at the recent track record of the USA with some anxiety: the great income and opportunity inequity in that country shows some of the signs of an extractive system. If this book sets more alarm bells ringing it will have done the whole world a service.

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