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Why Nations Fail: The Origins of Power, Prosperity and Poverty By Daron Acemoglu and James. A Robinson

13/02/2014

I first heard of this interesting book from an interesting source. On his personal blog, Microsoft founder and billionaire Bill Gates had read the book and written a review here. Gates was unimpressed with the book. He felt criticism of Mexican Carlos Slim (in Acemoglu and Robinson’s language a crony capitalist and beneficiary of “extractive institutions”) was unfair and that Slim had done a good amount to benefit that country.

 Gates’ view interested me but I gave it no further thought and might not have read the book myself had my rather considerate younger sister not sent it to me for my birthday. Whilst I do have some criticisms of the book and the structure which it adopts I am glad she did because there is a lot of information contributing to an intriguing narrative.

 Extractive vs. Inclusive institutions

The central theme of the book is that governments, courts and markets can work together to create a virtuous circle of inclusive institutions fostering economic growth and generating wealth. Conversely, the authors argue that these same players can create a vicious circle of extractive institutions where the political and corporate elite collude to extract wealth from the citizenry. Readers of this blog probably recognise that I am sympathetic to the idea of socially beneficial outcomes generated by relatively unencumbered markets supported by a framework of liberal institutions which give confidence to market players.  

 Glorious Revolution as a critical juncture

The authors give considerable attention to Oliver Cromwell’s glorious revolution of the 17th century which ultimately led to the 1688 Bill of Rights and a devolution of power from the king to an ‘elected’ parliament (albeit with extremely limited suffrage). Nonetheless, the idea that people could suddenly petition parliament for changes in the law seems to me in my limited historical knowledge a significant development in the evolution of western liberal democracy. The elites that previously held a privileged position allowing them to extract wealth from the populace faced challenges from upstart merchants who petitioned parliament for the removal of monopolies. There were clearly a multitude of factors which could have led to Britain’s industrial revolution* but it seems plausible to me that the inclusive nature of political and economic institutions could have been a factor. 

 What about China?

 The rise of China from a nation of peasants languishing in gruelling absolute poverty to a economic superpower in the present day (and the lifting of millions of ordinary Chinese out of absolute poverty) is one of the most significant events at the end of the 20th and beginning of the 21st centuries. Yet to look at China today it is also palpably clear that the authors’ model does not clearly fit with the Chinese rise.  State owned enterprises play a significant role in the economy and there is no liberal framework for the respect of property rights and agreed rules of contract as exists in developed western nations. China is also a one party state and there is not the contest of ideas in the political sphere which is present in established democracies. To their credit however, Acemoglu and Robinson do spend more time on China than other examples. Their conclusion is that China is akin to the Soviet Union circa 1960 in that it is experiencing growth under extractive institutions. Examples to support circle this view of China surround the treatment of the CCP toward potential rivals of state owned enterprises and those who disagree with the official line in general. I was unsatisfied with the section on China and the comparison with the USSR which I felt was imprecise. The USSR (as China was under Mao Zedong) was fundamentally antithetical to market capitalism but China under Deng Xiaoping’s reforms did embrace prices as a means of allocating scarce resources and has increasingly tapped into the modern integrated global supply chain. The USSR likely suffered collapse in part due to an ideological commitment to a centrally planned system of determining which goods and services should be produced. A lack of price signals caused shortages by distorting incentives and removing information from producers that no amount of threats from the politburo could overcome.  In my opinion China requires a more detailed analysis than simply drawing a likeness between it and the USSR**.

 Structural complaints

Their treatment of China led to one of my major criticisms of the book, in that it did not spend enough time on the really important examples.  I felt that while there were some very interesting examples, the book was too dense and almost laboured the point it was trying to make. Instead of having so many examples, the authors would have done better to upon setting out their thesis for why nations fail choose perhaps 4 or 5 good examples of inclusive institutions then the converse for extractive institutions. There were plenty of good nuggets of information but too many to really stick in the reader’s mind and make an impression.  The institutions hypothesis is not the only idea for how nations fail and another criticism of mine would be that the authors sometimes lacked strong rebuttals of alternative viewpoints. It also took me some time to get through the book and at times I found it a bit of a slog.

Overall I think the book does help to add to debates on the importance of institutions and good governance to economic development but I have reservations about some of the examples used and the manner in which the book was put together. So there you have it, I would give it a qualified recommendation and perhaps only one for those with intense interest in the subject matter.

*For example this paper posits that the geographic proximity of coal contributed to the industrial revolution.

 

**When I have some more time I would like to read How China became Capitalist by Ning Wang and the late Nobel laureate Ronald Coase which provides an analysis of the Chinese economic miracle as arising from bottom up production in areas where rules were not so cumbersome.

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