Monday, April 28, 2014

Why Nations Fail - Book Review

Why Nations Fail by Daron Acemoglu and James A. Robinson

The main thesis of this book makes sense.  “Extractive economies” run by an elite (such as aristocracies and slave economies) do not lead to sustained growth: people have little incentive to invest in new enterprises because the elite may take their property, and the elite often deliberately blocks growth because it could unsettle their privileges.  “Inclusive Economies,” with pluralistic governments, secure property rights and rule of law, lead to sustained economic growth.
There is a “which came first” problem, because there must be some degree of economic growth before pluralistic institutions develop. Thus, there were factories in England in the early seventeenth century, and the economic changes that had already occurred by this time made the middle class powerful enough that it could ultimately develop a pluralistic government with rule of law after the Glorious Revolution. Nevertheless, it does make sense that this “inclusive” government accelerated economic growth and made it sustainable, by providing the legal framework needed to encourage investment.
Yet this book claims that extractive or inclusive institutions are essentially the only thing that determines whether there can be sustained growth, and its wide-ranging history skips details about several countries that might challenge this thesis.
Switzerland threw off the aristocracy and developed an inclusive government long before England did, so why didn’t it develop the industrial revolution before England?  Obviously, because it is a land-locked, mountainous country, which lacked the transportation that could integrate it with the world economy.  Thus, it seems that geography is also important.
In the United States, this book uses the examples of Virginia, the Carolinas, and Maryland to explain why we developed an inclusive economy.  It says that these states were founded by aristocrats who wanted to create an extractive economy but who did not have enough indigenous people to exploit (as Mexico did), so they were forced to develop the more inclusive institutions that make the United States more prosperous than Mexico.  Yet we all know that these southern states developed an extractive economy based on slavery and that they were economic backwaters that were late to industrialize, while our industrial revolution began in the north. A later chapter talks about the industrial revolution beginning in the north because of the extractive economy based on slavery in the south, but without revising the earlier claim that America’s inclusive institutions began in these southern colonies. It seems that the southern states were founded by aristocrats, who managed to create an extractive economy despite the lack of indigenous people to exploit, while the northern states were founded by commercial interests (like New York) or by people seeking to be self-sufficient for religious reasons (like Massachusetts), who were more willing to create an inclusive economy.  Thus, it seems culture is also important.
Imperial Germany is the most puzzling case. Before World War I, it had an authoritarian government, and yet it was the fast growing economy in Europe, challenging England for economic dominance.  At the time, leftist economists used imperial Germany as evidence that an authoritarian governments were the best engines of economic growth.  South Korea and Taiwan have a similar history: development was successful under authoritarian governments, and these countries did not have inclusive governments until after growth had gone a long way.
Switzerland and the United States suggest that the contrast between inclusive and extractive institutions is an important part of the explanation of why nations become prosperous or poor, but that we have to modify this explanation so that it also includes other factors, such as geography and culture.
Imperial Germany, South Korea, and Taiwan suggest that the contrast between inclusive and extractive institutions might not always be the key to development after all. These countries challenge some of this books predictions, such as its claim that China’s growth will not be sustained.
It is possible that there is some explanation for growth in imperial Germany, South Korea, and Taiwan that can save the thesis of this book, but the book simply skips over these countries without explaining them. 
It has a map of countries that had abolished serfdom by 1800 (map 8), and it claims that this predicts their later economic success; yet the map shows that Greece had abolished serfdom while Germany had not, and we all know which of these two countries is more successful today. It mentions that Napoleon brought inclusive economic institutions to the western part of Germany, but it doesn’t explain why the united Germany was led by Prussia, its easternmost and most authoritarian state.
The failure to explain Germany, South Korea, and Taiwan is this book’s greatest weakness as history.
The failure to question the value of economic growth is its greatest weakness as politics. 
Clearly, growth was beneficial at first, when it was needed to reduce poverty.  Clearly, countries that have had growth, like the United States, are better off than countries that have never had growth, such as sub-Sahara Africa.  But after a country has a comfortable standard of living, further growth provides diminishing benefits and produces real environmental costs that we will have to deal with in the coming centuries.
This book takes the essentially conservative position that we should continue policies that were useful in the past because they promoted rapid economic growth. But policies that were useful in the past will not necessarily be useful in the future. 
When people ask why nations fail a century from now, “extractive” governments and economies may be less important answer than global warming.